How do you decide if you do a Roth IRA or a Traditional IRA? I know its one of life’s deep questions. Well here’s what the math says, if you had the same tax rate through out your life then you would actually end up in the same place using either one. But we all or hopefully all go through a cycle of being at the bottom of the income pyramid and moving our way up over time and then maybe stepping down again later in life. So for the typical person you will be paying the lowest taxes when you are younger and higher when your in your late 30’s to your 50’s or 60’s. So if you are a typical person that would mean saving in a Roth IRA early in life and then switching to a traditional IRA when you start to get into the upper income brackets. Also with a Roth IRA you can pretty easily take the money out that you have put in (but not any earnings), meaning if you are young and saving and later you want to buy a house that money is there if you need it. My general thought is if you are at or under the 12% federal tax bracket (income of $40,125 for a single or $80,250 for a family or below) you should be putting any savings beyond your emergency fund into a Roth IRA, and 24% or above the traditional IRA is probably the safer bet.
As you progress in your career, you may even come to the point where you can’t contribute to IRA’s anymore (or at least with no benefit). Having a built up your Roth when you are younger at lower taxes will look like a better and better deal to you! Always be thinking about your future self and how to make them feel great!
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