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Originally Posted by chubychecker
I have to disagree with you on this one al. Especially if you are young. A 30 year old will double his contributions likely at least 4 times before they retire. Would you rather pay taxes on $100 now or $1600 later. Even though many of us will be making less money when we are retired, we don't know what the tax brackets of the future will be. Also as al mentioned the IRS doesn't force minimum distributions on the Roth. They are also great for passing on money to heirs. If you were to pass away with a large traditional IRA, your heirs are forced to maintain distributions on that money. Thus uncle sam becomes a partner on their inheritance. The roth passes tax-free.
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I admit that the decision to contribute to Roth vs traditional is less cut-and-dried and I should call it my opinion rather than a widely-agreed fact. I can easily think of situations that could theoretically happen in this country over the next few years that would make my recommendation a horrible choice.
I'm using the assumption that even if the left takes over, they will continue to allow brackets to ratchet up every year and will not substantially increase taxes, nor will the GOP be allowed to go wild with tax decreases. If any of that happens, all bets are off and anyone's guess is as good as mine. I could see someone hedging their bets half and half if they are in an iffy situation.
OK, all that aside lets pretend nothing changes, then if your income tax bracket (and how deep you are into your current tax bracket) doesnt change, then its a wash.
Assumptions: earn 7%/year compounded annually, contribute $10,000 per year once per year starting in one year, retire in 30 years, and lets say that every dime of that money is in the 15% bracket. (or 25%, or any bracket, as long as it doesnt change) Lets say the raises you get keep up perfectly with inflation and the increase in tax brackets, so to make the math easy we'll freeze it here.
Roth: 1,500 goes to the govt, you put in 8,500 per year. After 30 years, you have $802,916.68
Traditional: All 10,000 goes into the IRA, after 30 years you have $944,607.86. Assuming every penny gets taxed at 15% in retirement, you send $141,691.18 to uncle sam, and you have $802,916.68
(Obviously you wouldnt pay the tax all at once, but rather gradually over time, but mathematically its still a wash under those assumptions)
Nothing changes, you have the same amount of money either way
if your tax liability also does not change.
This is purely a tax decision, if youll retire at a lower income tax bracket which a LOT more people will than think they will due to increasing tax brackets every year, then go traditional. If youll retire in a higher tax bracket, go Roth. You can also throw politics if you want. If you think our tax policy will become worse for you because of the politicians in power and all else is equal, pay the tax now. If you think youll have more breaks or a lower rate later pay it later.
For me, I'm in a rather high bracket and think the tax laws arent going to change much since they still need to get re-elected every year, so I'm going traditional until maxed out, then Roth, but other people's situation could be different.
If I thought it was truely a tie (my tax liability wont change now to retirement), I'd probably emphasise Roth due to the neat little perks they have. I dont plan on leaving anything to anyone, if I have a huge retirement account when I retire, its time to spend that money down before I croak
If someone wants to leave an inheritance, then a Roth is better to inherit.