How would the average person ever be in a higher tax bracket when they retire than when they're working and this scenario seems to be the only reason to get a Roth IRA?

Answer 1

This is true. Historically income tax rates have changed substantially over the years for the same levels of income. We have our busy legislators to thank for this. Having a Roth essentially locks in today's tax rates / structure. A non-Roth assumes that the money will be taxed at a lower rate in the future, which is a pretty big assumption. Will it? Who knows. But I'd bet good ol' US $ that the tax rate structure will be quite different in 20-30 years. It always has been... Sometimes higher, sometimes lower. Ideally, I would like to have a mix of retirement accounts, both Roth and traditional for just this reason. There are several other reasons to have a Roth other than what future tax bracket you will be in. My personal opinion is that if you are eligible to contribute to a roth (there are income restrictions) and you don't need an immediate tax deduction, the roth will generally be your better long term bet. Yes, we could all use a reduction in our taxes this year, but I'd rather use a tax-free account rather than a tax-deferred account. Of course the tax-deferred account is better than nothing. Consider the comparison of SOME of the differences between a Roth IRA and a regular IRA (as always, consult your tax advisor BEFORE contributing to either): Regular IRA: - MAY be able to deduct current year contributions from current year Adjusted Gross Income (AGI). - Tax deferral of any interest earned or capital gains realized until distribution (withdrawl from the IRA). - May start taking distributions, without penalty, once you reach 59 1/2 years old. - MUST start taking Required Minimum Distributions (RMDs) at age 70 1/2. Roth IRA: - MAY NOT deduct contributions. - Any interest earned or capital gains realized that are distributed after age 59 1/2 are done so ****TAX FREE**** as long as you have held the contributions in the Roth for at least 5 years! - May start taking distributions, without penalty, once you reach 59 1/2 years old. - DO NOT HAVE TO take ANY Distributions EVER. All that money growing for the last how many years can stay in a non-taxable account if you never need it. This means it can then be passed to your heirs instead of having to be withdrawn and taxed while you're alive (as is the case for a regular IRA). If you are not making too much money to qualify, if you ARE getting a refund, if your tax bill is low enough that an immediate deduction will have little or no impact, and/or if you can simply afford to pay your taxes without it being a burden too high to handle, go with the roth. The one other factor can be age (5-10 years). If you are pretty close to retirement, a roth may not be appropriate. In most cases, I think it makes more sense to pay a little in taxes now (not take the AGI deduction) so you don't have to pay ANY later. Also, if you need money for any reason, you can always take out your principle(the monies that u placed into the Roth), without penalty- even prior to 5yr and 59 1/2 restrictions