I used to not have any doubts about a Roth, but I’ve been considering that maybe it’s a little too much like giving the government a free loan. Do you know if there’s a thorough comparison anywhere between a traditional and Roth IRA that takes into consideration the opportunity cost of paying tax on the contributions?
The biggest question is, do you think your tax percentage will be higher now, or higher in the future? If you think your income might increase later (placing you in a higher tax bracket), or that the government might increase your tax burden later, then it’s better to pay taxes now.
That is a helpful comparison, but it assumes the same initial contribution. I think a better comparison would assume a higher initial contribution with a traditional IRA in order to account for the money being paid in taxes with Roth as being a missed opportunity. The money that went to taxes in the case of a Roth could have been additional investment in the the case of a traditional.
But you will pay taxes on the growth of the account later. Whereas a Roth grows tax free.
Ultimately it depends on what you think you will make in retirement. Both traditional and Roth IRAs are tax advantaged accounts, it just depends on when you want to pay the tax. It also depends on what kind of investments you are doing in those accounts. For something like the S&P 500, you can expect it to grow so a Roth is more tax advantaged than a traditional. However, we also aren’t talking about huge investments either l, so do your own research and see what you want to do.
I used to not have any doubts about a Roth, but I’ve been considering that maybe it’s a little too much like giving the government a free loan. Do you know if there’s a thorough comparison anywhere between a traditional and Roth IRA that takes into consideration the opportunity cost of paying tax on the contributions?
Here’s a useful comparison.
The biggest question is, do you think your tax percentage will be higher now, or higher in the future? If you think your income might increase later (placing you in a higher tax bracket), or that the government might increase your tax burden later, then it’s better to pay taxes now.
That is a helpful comparison, but it assumes the same initial contribution. I think a better comparison would assume a higher initial contribution with a traditional IRA in order to account for the money being paid in taxes with Roth as being a missed opportunity. The money that went to taxes in the case of a Roth could have been additional investment in the the case of a traditional.
But you will pay taxes on the growth of the account later. Whereas a Roth grows tax free.
Ultimately it depends on what you think you will make in retirement. Both traditional and Roth IRAs are tax advantaged accounts, it just depends on when you want to pay the tax. It also depends on what kind of investments you are doing in those accounts. For something like the S&P 500, you can expect it to grow so a Roth is more tax advantaged than a traditional. However, we also aren’t talking about huge investments either l, so do your own research and see what you want to do.