For most people, choosing which IRA they will use for retirement planning is one of the most important decisions they will ever make.
The crucial difference lies in when you pay taxes on your contributions.
With a traditional IRA, you pay taxes when you withdraw the money at retirement. With a Roth IRA, you contribute to the plan with after-tax dollars and then withdraw the money tax-free at retirement.
With both of these plans, your money will grow tax free while it’s in the account. Because Uncle Sam will get his money one way or another, you need to ask yourself, “Do I want to pay taxes now or later?”
I don’t know your current situation but I want to point out that although they seem high, taxes are at a historic low. Today, the highest marginal tax bracket is 39.6%. The government started income taxes in 1913, and the first federal income tax rate was only 1%. Thirty years later, in 1943, the highest marginal tax bracket was 94%!
The crucial difference lies in when you pay taxes on your contributions.
With a traditional IRA, you pay taxes when you withdraw the money at retirement. With a Roth IRA, you contribute to the plan with after-tax dollars and then withdraw the money tax-free at retirement.
With both of these plans, your money will grow tax free while it’s in the account. Because Uncle Sam will get his money one way or another, you need to ask yourself, “Do I want to pay taxes now or later?”
I don’t know your current situation but I want to point out that although they seem high, taxes are at a historic low. Today, the highest marginal tax bracket is 39.6%. The government started income taxes in 1913, and the first federal income tax rate was only 1%. Thirty years later, in 1943, the highest marginal tax bracket was 94%!
The excessive 94% tax rate was placed on anyone who earned more than $200,000. Here’s a funny story – Ronald Reagan, actor turned president, had a disincentive to work because of the high tax. If you look at his filmography, you’ll notice that Reagan never made more than two movies per year. This is because he made about 100K per movie. Since he would only keep six cents out of every dollar after the second movie, he just stopped working. Actually, he probably didn’t even get to keep the six cents because of state taxes.
Here’s the truth: taxes could very well double. History shows that the rates have been much higher. Therefore, if you’re planning for retirement, I would strongly consider a Roth IRA. By doing this, you’re protecting yourself against any future tax increases by paying taxes now.
With traditional IRAs, you must start withdrawing the money by age 70.5, even if you don’t need it. Roth IRAs are more flexible, as you can leave the money in your account for as long as you need and let it grow as you get older. Years from now, you can keep watching your money grow, knowing that it’s safe from Uncle Sam!
Here’s a pretty cool YouTube video going into more detail: https://www.youtube.com/watch?v=iTEzh6gla7I
Here’s the truth: taxes could very well double. History shows that the rates have been much higher. Therefore, if you’re planning for retirement, I would strongly consider a Roth IRA. By doing this, you’re protecting yourself against any future tax increases by paying taxes now.
With traditional IRAs, you must start withdrawing the money by age 70.5, even if you don’t need it. Roth IRAs are more flexible, as you can leave the money in your account for as long as you need and let it grow as you get older. Years from now, you can keep watching your money grow, knowing that it’s safe from Uncle Sam!
Here’s a pretty cool YouTube video going into more detail: https://www.youtube.com/watch?v=iTEzh6gla7I
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