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Should I Open A Roth Or A Traditional IRA?

Current and Future Tax Brackets

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Do you think you'll be in a lower tax bracket upon retirement or disability than you are now? If, for example, you're single and earning $20,000 a year, then you are already in the lowest tax bracket. Therefore, the tax-deferral advantage of a traditional IRA is lost (but not the advantage of paying less taxes now, when you may need the extra cash). A Roth might be better for you if you can afford to pay your full taxes now.

On the other hand, let's say:

  • You're in mid-career, earning $100,000 a year.
  • You work for a small new business that doesn't offer a retirement plan.
  • The only retirement savings you have will be your IRA and you have no disability insurance.

In this case, a traditional IRA might be better for you. You'll be saving 31% in Federal income taxes on the money you contribute, letting your money grow without paying taxes on the earnings as they accumulate. You will only pay taxes on it when you withdraw the money. At that time, your taxable income will probably be low enough so that you end up paying 0 or 15% of the amount withdrawn in taxes -- depending on the amount of distribution you take and any other income.


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