So, the question remains as to which is better: a traditional IRA or a Roth IRA. The former gives you a tax break this year and tax-deferred earnings, but taxes you at withdrawal. The latter doesn't give you anything now (you contribute with post-tax money) but earnings are tax free. The correct answer seems to depend on a couple factors: 1) your specific situation and 2) what tax rates will be in the future. It's likely that point #1 can be of some help, but we're all merely guessing at point #2. The general thinking is that tax rates as a whole will likely be higher when we all retire, but that we'll also be in lower tax brackets then too (since we'll earn less.)
So with everything clear as mud, I thought I'd post two (somewhat) different viewpoints on the issue that were listed as comments to my post titled Retirement Smackdown: Which is Better -- Traditional IRA or Roth IRA? First, here's a comment favoring the traditional IRA:
The vast majority of people will be in lower tax brackets at retirement so would do better with a Traditional. They are, however, the ones that likely aren't saving anyway, so those that are saving may well prefer a Roth.
This (at least the first part) is what my line of thinking has been recently as well. But then, we had this comment:
One more thing to add. The assumption that your income tax rate will be lower in retirement is really faulty. I am a CPA so let me show why.
1 - Incomes tax rates are at historic lows right now
2 - Things people don't consider in retirement that I see with my clients all the time - you will likely be single (widowed or divorced) much of retirement, which today would mean if you had 1/2 the income you had as married you'd still be in the same tax bracket. You brush up against the next higher tax bracket a LOT sooner when you are single. That's unique to today since the marriage penalty was removed though, and will probably be back soon enough. Hard to explain, but makes a difference for now, maybe not for the long-term.
More importantly, in retirement you expect to make a lot less money, but you also lose most of your tax deductions. Just because your income is lower does not mean your taxable income is lower... Most of my six-figure working clients with families are in the 15% tax bracket these days while most my $50k/year retiree clients (most who are divorced or widowed) are in the 25% bracket. The difference is simply the amount of tax deductions.
So the real answer is still somewhat unclear. Could it be that they are equally good based on the fact that we can't accurately predict taxes?
For some additional thoughts on this topic, see these links:
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