Do you think you’ll be in a higher tax bracket during retirement than you are now?
The answer isn’t solely based on your future income—although you may scamper up the tax ladder as you accumulate wealth. It also depends on federal tax rates.
The way things are looking now—with a $1.4 trillion budget deficit—taxes may indeed increase from today’s historic lows. And that can have enormous implications for your investment strategy.
As you’ve probably noticed, the debt ceiling is a political hot potato. Politicians are wrestling with taxes and government spending as they seek ways to pay down our debt.
Regardless of where you land on the political spectrum, you may want to protect your nest egg from the possibility of a bigger tax bite down the road.
Contributing to a Roth IRA is a great way to do this, since you contribute after-tax dollars, and then enjoy tax-free withdrawals during retirement. (Learn more here.)
If you have a tax-deductible IRA and/or a 401k, you do get a tax break for those contributions now, but you’ll be taxed at ordinary income rates on your withdrawals. So keeping some of your money in a Roth provides extra tax protection.