What are the key factors in determining whether I should go Traditional or ROTH?

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Both IRAs and 401ks let you choose Roth or Traditional.

  • Roth means you pay the taxes up front (invest with after-tax income) and then the investment grows tax-free and you get to eventually spend it without ever paying any more taxes on it.
  • Traditional is the opposite – you pay no income tax up front (contributions are tax-deductible), but you pay taxes at the end when you cash out.

So the question is will my tax rate be higher when I retire or now?”

For most people the answer is higher when you retire so we recommend Roth.

The current national debt and demographics mean tax rates will have to go higher over the coming decades. Also, as you get older you are likely to earn more money and be in a higher tax bracket. The only caveat is that you probably won’t be earning an income in retirement so you may be back in a low tax bracket. It’s a judgement call, but for most people right now the correct answer is Roth due to rising national tax rates.