The Federal Tax Credits Blog

Posts Tagged ‘dependent care tax credit phase out’

Question: Would traditional IRA be better?

My husband and I are both in our early 30’s. We are probably peaking at our salaries now and are in the 25% tax bracket. Also, our AGI (adjusted gross income) is such that certain deductions are starting to be phased out for us (student loan interest, dependent care credit, child care credit). I would expect for us to be in a lower tax bracket at retirement, relying mainly on investment income and social security income.

We would like to start contributing the maximum to IRA’s for each of us. Currently, that would be $8,000 per year for both of us. I have almost convinced myself that a traditional IRA would be better for us given our circumstances. Any thoughts or advice (from professionals, preferably)?
No, neither one of us are self-employed and neither one of us have retirement plans at our places of employment.

Answer: Personally I would go with the Roth. If you’re going to max it out either way, the Roth will be better for you in the long run. Say you max out your IRA for the next 20 or 30 years and end up with $1.5 million. If that money is in a Roth, you can withdraw the entire balance–you have $1.5 million. If that money is in a regular IRA, you can only withdraw around $1.2 million, assuming you’re in the 20% bracket. Is the minor tax deduction you’ll get each year really worth losing out on $300,000 in retirement funds?

Besides, you’re assuming tax rates stay the same. I think we’ll all be in higher tax brackets in 20-30 years because the government will have to raise them. 25% or 30% might seem very low when we retire! I’d rather not worry about that and pay taxes now.

How Investors Can Adjust to Expiring Tax Provisions

A set of tax provisions that are scheduled to expire at the end of this year will change the tax landscape for many investors who will need advice on how to adjust.

Peter Newman, Scott Borden, Michael Lee: Economics 2009