IRA - Roth or Traditional? Long Range Tax Planning?

Question

O.K. I know that a Roth IRA uses after-tax dollars and grows tax free and that certain contributions to a traditional IRA are deductible. Has anyone considered the very long range (30+) impact of federal income tax rates on their decision of which form of IRA to select. Given the level of the deficit and the national debt, I sense that we may be in a period of historically low federal income tax rates and that in, say 30 years from now, rates may be so high that I end up paying more taxes on withdrawals from a Traditional IRA than that taxes I would pay on my contributions to a Roth IRA today. Your thoughts?

Answer 1

I'm a CPA and the Roth beats the traditional in almost every situation. Think of it this way.......which is better? Tax Deferred or Tax-Free? With the traditional IRA you eventually pay the piper.

Two possible exceptions: In the 401(k) scenario with an employer match, always take the free money. Secondly, if you are nearing retirement and we are expecting a down market over the next five years, that might be a scenario where the deduction rather than the tax-free growth might make sense. Run the numbers if this latter situation applies to you.

Answer 2

We have had a major tax bill or two every year since 2000. Accurate long range planning is impossible. I like a mix of the two accounts as well as money in a regular taxable account. A great deal depends on what income you will have in 30 years which is unknowable. I favor the current deduction at least to the point you are in the 25% or above tax rate.

Answer 3

Only from the point of view that the closer you are to retirement and the better the prospects that your retirement tax bracket will be significantly lower the better the deductible IRA looks.
There is also a cynics view of the future that says that the government is doing this to get more income tax now and then in thirty or so years they will switch to a consumption tax and get more taxes when the money is withdrawn to spend.