Andrew Jackson
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Location: California
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| Tax Bracket and IRAs? |
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Hey all, trying to get serious about my financials. Just stumbled across this site. Looks pretty cool. Anyways, I have a question about the Tax Brackets and traditional vs Roth IRAs.
I'm 25 and currently in the 15% tax bracket. I predict that my tax bracket will probably be 25% for the majority of the rest of my working life. I believe I have read that you should open a Roth IRA if you think your tax bracket will be higher in retirement than it is while you are working, correct? I have also read that for the majority of people, the Roth IRA is the one to go with.
A couple questions. What if your tax bracket is exactly the same in retirement? Should you go with the traditional IRA? And, how is your retirement tax bracket calculated? Is it the tax bracket you are in during the last year that you were employed? Or can it fluctuate throughout retirement?
Thanks for all the help in advance.
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Sun Feb 14, 2010 6:32 pm |
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oldguy
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quote:
I'm 25 and currently in the 15% tax bracket. I predict that my tax bracket will probably be 25% for the majority of the rest of my working life.
If your bracket will be 25% to 28% while you work and drops to 15% when you retire, then it is better to use the 401k - ie, take the tax break now and pay the taxes a little bit each year after you retire.
Conversely, if you are in a low income bracket, it is best to pay the taxes now, and take the tax break after you retire (Roth).
Here is another approach - we cannot know what the Tax Code will be 2050, I've seen a dozen major changes since I got out of college about 50 years ago (before IRAs & 401ks were invented). So diversify the tax status of your investments by funding both, that way you won't be 100% in the wrong fund at age 65.
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Sun Feb 14, 2010 8:28 pm |
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Andrew Jackson
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quote:
Originally posted by oldguy
If your bracket will be 25% to 28% while you work and drops to 15% when you retire, then it is better to use the 401k
How does the tax bracket drop? Do most people have their tax bracket drop after they retire? I don't have the option of being in a 401K plan. And my long term goals are to start up my own small business (pizza parlor) so I don't think I will be able to ever use a 401K. But are their other retirement options for small business owners outside of IRAs?
quote:
Originally posted by oldguy
So diversify the tax status of your investments by funding both, that way you won't be 100% in the wrong fund at age 65.
That might be a good idea. I'm wondering if one were in the wrong IRA how screwed would they be? Choosing either one would be better than having just saved your money in a 1 or 1.5% savings account for 30 years right? I mean you are not going to lose money right? Just not going to maximize your retirement to the fullest.
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Mon Feb 15, 2010 1:11 am |
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oldguy
Senior Member
Cash: $ 275.70
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quote:
How does the tax bracket drop? Do most people have their tax bracket drop after they retire?
It is common that the bracket is lower in retirement. A wage earner may have a $100,000 salary and be in a 28% or 35% bracket during his working life. When he retires he could get SS (partly taxable) and he would sell about 4% of his 401k each year. So if he stayed under about $65,000 his tax bracket would be 15%.
quote:
Choosing either one would be better than having just saved your money in a 1 or 1.5% savings account for 30 years right?
Generally a wage earner cannot 'save' their way to wealth - he could put away $5000/yr for 30 yrs and would only have $150,000 (less than that in real money becasue inflation would grow faster than the 1.5%). But that same $5000/yr invested at 12%/yr would be $1,350,000. It is very important to invest, not save, during your working years.
A small business owner can have a SEP IRA, you can contribute up to $49,000/yr - so it is much more powerful than a tradtional IRA with its $5000 limit.
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Mon Feb 15, 2010 2:26 am |
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coaster
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I think that speculating on your retirement tax bracket, when it's this far away, should be a relatively minor criteria in your decision-making process. If anything, take the conservative view that taxes in the future will be higher, and that you wish to avoid having to pay taxes on retirement income. Then, if you're wrong, you'll have more income rather than less. True, with a traditional IRA you get a tax deduction now. And if you need those deductions now, then that's a bigger factor in your decision. Now always carries more weight than the distant future. Just keep reevaluating as time goes on.
~Tim~
Eye Candy : Why Whimsy
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Mon Feb 15, 2010 2:45 am |
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