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there are a couple of other issues unmentioned in this commentary:

1) the possibility that future tax rates may be higher (or lower) than current tax rates. if the long-term past is any guide, they will be higher, which makes the Roth a better deal.

2) future tax law changes which may retroactively eliminate any tax benefits of the Roth. nothing you can do about this, and probably shouldn't factor it in planning, but it is certainly a possibility.




Pay taxes now, or later?
So, the question is, do you want to cut your tax bill now or in retirement? All kinds of calculators can theoretically indicate which account will provide more in retirement. (We have several Roth IRA calculators, and you can try out the worksheet in the right column of this SmartMoney.com article.) The conventional wisdom is that if your tax bracket now is higher than your bracket will be in retirement, a deductible account might be the better bet.

However, the problem with calculators and similar analyses of the Roth vs. traditional IRA/401(k) dilemma is they assume that any tax savings realized from contributing to a deductible account will be invested elsewhere and left alone for retirement. However, this just isn't a realistic assumption. People don't say to themselves, "Well, my tax bill is $800 less because I contributed to my 401(k), so I'll buy 32 shares of Microsoft (Nasdaq: MSFT) and not touch it until I'm 65."

No, that tax savings usually goes somewhere else -- and usually not to any type of savings account. Boiled down to the essentials, you're contributing to a retirement account to make your golden years more affordable, not to give yourself a tax break today (as great as that can be). And the retirement account that will require you to pay less to Uncle Sam after you've stopped working -- thus leaving more in your bank account -- is a Roth IRA.

Put another way, do you want the heavier tax burden now, while you're still earning a paycheck and can cover the liability, or when you've stopped working, and you can't make up for anything Uncle Sam takes away?

Finally, the more taxable income you receive in retirement, the more likely your Social Security benefits will also be taxed. Income from a Roth IRA, however, does not affect the calculation of whether you'll pay taxes on a portion of your retirement benefit check.
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