Roth IRA or Traditional IRA

[Anonymous]

I’m looking for recommendations in terms of choosing Roth or traditional IRA. I am familiar with their differences, but having difficulty deciding on its tax deferred merits. Do you speculate that interest rates will be much higher 20-30 years from now? Thanks!

[Anonymous]

Well first you have to ask, have rates increased in the last 20-30 years? Aside from that it's more about whether you want the Tax burden now, when you're young and presumable can afford it. Or much later when you'd most likely be living on a limited income?

It's a personal choice.

[iced]

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@Anonymous wrote:
I’m looking for recommendations in terms of choosing Roth or traditional IRA. I am familiar with their differences, but having difficulty deciding on its tax deferred merits. Do you speculate that interest rates will be much higher 20-30 years from now? Thanks!

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It's not like taxes can go much lower than they already are. My assumptions are less about the rates changing between now and then and more about my personal bracket changing between now and then. If one is in the 32% bracket today for income but plans to be in the 10 or 12% bracket for income in retirement (excluding capital gains here since that's taxed differently and after income), even with some adjustment to tax rates, is it a net gain or loss to go with Roth?

Most people will say go as much Roth as one can, though I think it's a bit more situational. The biggest reason to consider Roth is it encourages more net saving, since very few people are also saving the income they still received as a result of the tax breaks on a traditional IRA today, whereas that's already baked into Roth contributions.

[Duke_Nukem]

One thing to also consider is where do you plan on living when you start drawing out your funds.  If you currently live in a state that imposes an income tax but you plan on moving to a state that does not have an income tax (at this time anyway), then you may lean toward Traditional instead of Roth.  Reasoning here is that you are exempting your funds from your current state's income tax, and you will be cashing the funds out in a state that doesn't impose an income tax.

It could also depend on the political state we are in now versus the future.  You may be seeing a much higher income tax in the future, which would mean Roth is the better option because you may be paying less in tax now than in the future even if you expect to claim lower taxable income in the future.

Roth does have some definite advantages other than just the obvious, but the choice is ultimately dependent on the individual.  There are some sites that provide a tool to help choose Traditional vs Roth by entering current and expected tax bracket info (I think Fidelity or Vanguard or one of the other big ones).

[wa3more]

Do both. Depends on where you think your bracket will be when you retire. Which is hard to predict. Rates can't go much lower but I'll say probability is higher due to government need for revenue in future 

[Citylights18]

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@wa3more wrote:

Do both. Depends on where you think your bracket will be when you retire. Which is hard to predict. Rates can't go much lower but I'll say probability is higher due to government need for revenue in future 

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They are sneaky with taxes too as its not so much the rates going up but closing deductions.

SALT tax limit of 10,000 state, local and property tax is one example of this. 

[wa3more]

Good point. I'm on Long Island NY so SALT has big impact 

[Revelate]

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@wa3more wrote:

Good point. I'm on Long Island NY so SALT has big impact 

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Indeed.  My effective tax rate went up since that change.

At some level I'm making plenty of money (for now) and therefore increased taxes aren't the end of the world for me... but when it comes to a ruthless financial optimization goal, meh, time to move.

It's just not in the cards for the next six or so months.

[iced]

Another reason I’m glad I’m weighing retirement heavily toward capital gains-based income. It’s not a factor in a lot of tax calculations and it’s probably one of the last areas that will get nerfed in the tax code...at least as long as the wealthy keep out-lobbying everyone else.

[Revelate]

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@iced wrote:
Another reason I’m glad I’m weighing retirement heavily toward capital gains-based income. It’s not a factor in a lot of tax calculations and it’s probably one of the last areas that will get nerfed in the tax code...at least as long as the wealthy keep out-lobbying everyone else.

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Don't know; look at Davos this year and the main theme has been stakeholder value.

We lag behind Europe when it comes to such things probably by 10-20 years as a SWAG, but I suspect it's coming.  It might not even have to be in the tax code frankly... certainly for big mature companies most profit sharing goes to shareholders today, but even on the ground in my own little economic bubble I'm starting to see changes in that over the past few years.

We'll see I guess but I think I'm going to be diversifying my future income streams to more passive returns vis a vis real estate in some form or fashion.