Actual Advise on Roth vs. Traditional

[Guest Birdman33]

I have read much of this board, and it looks like the Roth IRA is the preferred IRA. But I am a 29 year old that owns a home already. I am looking for the best IRA to gain me the most retirement income, AND help me right now. If I am in the 39% tax bracket right now, would I not be better off with a traditional IRA rather than a ROTH, since I assume my tax bracket will drop when I am at retirement? Isn't the rule of thumb that older investors should open a ROTH, while younger investors should stay with a tradtional?

If anyone has ANY advise, or links to areas where this topic is addressed I would appreciate it.

[John G]

You raise a good question.

First question for you is are you sure that you qualify right now for a Roth or deductable IRA based upon your current income and filing status?

If you currently live in a state with no income tax (like FL, NH, WY, etc.) or a low income tax state, then the deductability means less -- just thought I would throw that in since people often forget state taxes. If you expect to live in retirement in a state with no income taxes (if any are left by then) then lean towards taking the deduction now. Since you are only 29, I doubt you have any idea about where you will live in retirement.

You said you are in the 39% bracket right now. That sounds like a fine income... professionals, execs, or high level manager? My guess is that over the next 20-25 years you will amass significant assets. Perhaps you will add an inheritance to the mix eventually. Add SSN and pension income. Then there is the accumulation of home equity that often gets converted in retirement to additional income. On the government side, you could see higher taxes either from the IRS or states. It is unlikely that your crystal ball is beautifully clear, but I think you could make the case that down the road your income (without kids or mortgage interest deductions) will keep you in a fairly high bracket. In my experience folks with high incomes as workers often have substantial incomes in retirement and don't see a huge drop in marginal tax rate. You need to think about your circumstances try to judge where things might be going.

The government reneging on Roth tax free status is, in my opinion a very slight possiblity, but some will make decisions based upon this. I would assume that all existing Roths would be grandfathered. Roths give you more flexibility in deciding when to take money out. They also have some positive inheritance features.

From the various articles and spreadsheet models I have looked at, a hybrid approach often gives you the best result.

No one can tell you the "right" answer. If you ask people to rewind the clock 10 years and explain how much of what has happened in their lives (relocation, promotions, new jobs, death in family, personal health, children, etc.) they could have predicted, the answer is often less than half. Roths have only been around for 5 years (government example) and the WTC was still standing 5 years ago too. My point is that you are making decisions about a future that is hard to predict.

Also remember that there are 403b, 401k, Keogh, SEP IRA and pension/profit sharing plans that may be a better mechanism for you to amass wealth.

Good luck.

[Guest taylorjeff]

Just to follow up on John's reply, you will probably accumulate significant assets prior to retirement. In most cases, distributions from these plans will be taxable. Depending on your total income, a portion of the SS may also be taxable. In my case, I have substantially more assets in a rollover IRA than my Roth. At some point (and no later than the year after I turn 70&1/2) I will have to take sizable distributions from the traditional IRA that could push me into a higher bracket. One thing I liked about the Roth was more flexibility in taking distributions. In years where I might want more $ (a trip, vacation home, etc), I'll be able to pull out the money tax free.