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Traditional vs Roth IRA tax implications - which is better for someone in their 30s?
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I'm 35 and finally getting serious about retirement savings. I keep hearing about traditional vs roth IRA tax differences but I'm confused about which makes more sense for my situation.
I make about $85k a year right now, and I expect my income to increase over the next 10-15 years. The traditional IRA gives me a tax break now, but the Roth IRA means tax-free withdrawals later.
What I'm really trying to understand is the long-term traditional vs roth IRA tax implications. If I think I'll be in a higher tax bracket when I retire, does that automatically mean Roth is better? Or are there other factors I should consider?
Also, are there income limits I need to worry about? I've heard mixed things about whether I can contribute to a Roth at my income level.
I'm in a similar boat - mid-30s trying to figure out retirement. What I've learned about traditional vs roth IRA tax implications is that it really depends on your current tax bracket vs where you think you'll be in retirement.
If you're making $85k now and expect to be making more later, the Roth might make sense because you pay taxes now at your current rate. But here's the thing - when you retire, you might not have as much taxable income as you think. Social Security, Roth withdrawals, and maybe some pension income might keep you in a lower bracket.
One thing that helped me decide was realizing that with a traditional IRA, you're required to take minimum distributions starting at age 73. With a Roth, there are no RMDs during your lifetime, which gives you more flexibility.
As a freelancer, the traditional vs roth IRA tax decision is tricky because my income varies so much. Some years I'm in a higher bracket, other years lower. What I've settled on is contributing to both.
I put money in a traditional IRA during high-income years when I want the tax deduction now. During lower-income years, I contribute to a Roth since I'm in a lower tax bracket anyway.
For your income level ($85k), you should still be able to contribute to a Roth IRA directly. The phase-out for single filers starts at $138k for 2023, so you're well below that. But if your income increases, you might need to look at backdoor Roth contributions.
The traditional vs roth IRA tax implications also matter for estate planning. Roth IRAs can be passed to heirs tax-free, while traditional IRA withdrawals are taxable to your beneficiaries.
I've been researching this traditional vs roth IRA tax question too. One factor people often overlook is state taxes. If you live in a high-tax state now but plan to retire in a no-tax state (like Florida or Texas), a traditional IRA might be better because you get the state tax deduction now and won't pay state taxes on withdrawals later.
Also, consider your access to other retirement accounts. If you have a 401(k) at work, you might want to max that out first since employer matches are essentially free money. Then you can think about IRA contributions.
The traditional vs roth IRA tax implications also depend on whether you think tax rates will go up in the future. With the national debt where it is, some experts think tax rates will have to increase, which would make Roth accounts more valuable.
I went with a Roth IRA when I was younger and I'm glad I did. The traditional vs roth IRA tax decision seemed simpler to me - pay taxes now at a known rate rather than gambling on what tax rates will be in 30+ years.
At 35, you have a long time horizon for that money to grow tax-free. The power of compound growth without having to pay taxes on dividends and capital gains each year is huge.
One practical consideration: with a Roth IRA, you can withdraw your contributions (but not earnings) at any time without penalty. That gives you some flexibility if you have an emergency. With a traditional IRA, early withdrawals are generally subject to taxes and penalties.
For income limits, at $85k you're fine for direct Roth contributions. The limit for single filers is $153k for 2023, so you have plenty of room to grow.
The traditional vs roth IRA tax question gets even more interesting when you consider Required Minimum Distributions. With a traditional IRA, you have to start taking money out at age 73, which could push you into a higher tax bracket in retirement. With a Roth, no RMDs during your lifetime.
Also, think about your retirement income sources. If you'll have a pension, Social Security, and maybe rental income, adding taxable traditional IRA distributions on top of that could create a tax burden. Roth withdrawals won't increase your taxable income.
One strategy I've seen recommended is to have both types of accounts. That way, in retirement, you can manage your taxable income by deciding which account to withdraw from each year. You can take enough from traditional accounts to fill up lower tax brackets, then use Roth for anything beyond that.
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