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Financial Planning / Tax Strategies


Subject:  Re: Roth versus Traditional IRA Date:  2/2/1998  9:26 PM
Author:  JeanDavid Number:  1685 of 127549

<In advising my parents about the Roth IRA, I discovered that basically the Roth comes down to a simple property of multiplication, the associative property.

The basic future value formula for an investment is as follows:

([Principal]*(1+[Interest Rate])^[Number of Periods])

The Roth IRA takes its tax rate at the beginning, multiplying by the principal. The Traditional IRA takes its tax rate at the end, multiplying by the whole thing. But it really doesn't matter if the tax rate is the same. However, we all usually expect the tax rate to be different. We expect it to be less at the end. So that, I believe, makes the Traditional IRA more attractive for most people. >

Why are so many such pessimists as to "expect [the tax rate] to be less at the end?" It seems to me that if people start investing reasonably early and do reasonably well with their investments, their incremental tax bracket could well be HIGHER at the end than when they are working. This could well make the decision of whether to invest in a conventional IRA, a Roth IRA, or a taxible brokerage account different.
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