No. of Recommendations: 11
Now I keep seeing things that say "If you are expecting lower taxes after retirement it is proabably best to use a deductible IRA."

It's hard to predict what will happen in 40 years, isn't it?

If you are starting to invest now at age 18, I would hazard a guess that your retirement income will probably be at least as great as your current income, and I would be guessing that your taxes would likewise be at least as high, so I would be inclined to suggest a Roth IRA.

Generally, ignoring secondary factors, I would recommend prioritizing your retirement investment dollars as follows:

1. If your employer has a retirement investment plan such as a 401(k), 403(b), or equivalent, and if your employer has a match, contribute to it up to the maximum amount matched by the employer. This is like "instant return on investment" that is pretty hard to beat.

2. If you still have money to invest for retirement, or if your employer doesn't have a match, I would suggest next contributing to a Roth IRA up to your legal limit. You can have the Roth IRA at just about any financial institution, such as a mutual fund family (e.g., at Vanguard if you wish to have your Roth IRA invested in the Vanguard Total Stock Market Fund or the Vanguard 500 Fund), or a discount broker (if you wish to own stocks, or you wish to own mutual funds from a variety of fund families).

3. If you still have money to invest for retirement, contribute to your employer's 401(k) or 403(b) up to your legal limit if it makes sense to do so. (It might not make sense if your only choices have high expense ratios.)

4. If you still have money to invest for retirement, you may want to look at reasonably tax efficient investments, such as stocks you can hold for the long run, or "tax managed" mutual funds, or mutual funds that tend to have low turnover such as an index fund.

Not knowing what the tax picture will be like in 40 years, it does make a certain amount of sense to invest with a variety of tax strategies in mind:

1 & 3: This is generally pre-tax money, so you get a tax break today so you can invest more of your money, but at retirement it will be taxed at ordinary income tax rates. If income tax goes away, this account (and the deductable Traditional IRA) would be a distinct advantage. Likewise, if your retirement income is predominantly from your investments (instead of pensions), you are saving today at your marginal income tax rate but would be taking money out at your average tax rate, which likewise is a distinct advantage over a Roth IRA.

2: The money goes into the Roth after taxes, but (at least under current law) comes out tax free. If it ends up that you are taxed at a higher rate in retirement, the Roth IRA is a "steal". If you are taxed at the same tax rate, it is a wash between the Roth IRA and pre-tax-invested/taxed-on-withdrawal plans like 1 & 3 and a deductable Traditional IRA.

4: The money is invested after taxes, but is taxed at long-term capital gains rates or the new super-long lower rates when the investments are sold if they had been held long enough (and for the new lower rates, purchased after January 1, 2001). Generally 1, 2, and 3 would be better than 4 unless one is looking at high expense ratios for 3.

If your employer does not provide any 401(k), 403(b) or similar plan, I would probably still be inclined to suggest a Roth IRA for the first $2,000 you have for retirement investments ($3,000 next year) unless you somehow can get an estimate on what retirement income would be like.

Now in olden days the conventional wisdom used to be that one's retirement income would be less than one's wage-earning income and thus taxes would probably be less, but someone making use of the more recent "tax favored" accounts over many decades run the risk of having more income, not less, in retirement.

Even if I am completely wrong about deductable Traditional IRA vs. Roth IRA, I suspect the error wouldn't be all that great--it is more important to develop good habits of living below one's means and performing some form of systematic savings and systematic investing so one is investing (and hopefully also "sheltering") money for retirement than it is to come up with the "perfect" plan. And later if you discover that the optimum approach is different than what you are doing, you can adjust then, but meanwhile you will have a jump on the vast number of Americans.
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