$$$ Benchmark as of 6/23/17

JStrnad said:

One thing I didn't count on when I contributed to an IRA was the full tax picture. The notion was that I'd put the money in before taxes were taken out, then pay tax when I withdrew the money, assuming that I would be in a lower tax rate after retirement. As it turns out, if I make more than a fairly minimal amount of money outside of social security, I have to start paying taxes on my social security. So as I draw out money from the IRA, I not only pay taxes on THAT money, but it causes me to pay taxes on my SS. Kind of a double tax whammy. I'd have paid less tax on this money at the time I earned it.

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Take me who earns a nice salary in the low 6 figures. As a single my marginal tax rate is 38% (28% federal, ~10% state). Putting money into a traditional IRA (or 401k) saves me 38% on taxes that can be invested elsewhere (or if I can only max it out due to the tax savings, it enables me to max it out).

If I'd put it into a Roth IRA/401k. I'd pay 38% tax on what I put in, but wouldn't pay any tax on it when I withdraw it.

In the traditional case, I do pay tax on withdrawal, but its is most likely going to be less than 38% (In retirement I'll have much more control of my tax situation, can move to a tax free state with much more ease....)

So, a Roth makes sense in basically 2 situations.

1) You'll waste the tax savings. If you won't waste the tax savings (i.e. you need it to live today, so would be putting in 38% less into the IRA/401k or you will put it into index funds and not touch it), you're better of doing that.

If you'll waste the tax savings, having less overall money today is worth it, as you'll have more overall money in the future. If you wont waste it today, I believe one does better off deferring the taxes.

2) your income tax rate today is really low (i.e. you're a student making $5-10K a year in a summer job, but living either off of scholarship / parents), as your income tax owed on this will be close to 0 as it is, so might as well have it grow and be usable in perpetuity tax free.

I'd also note that there's a risk involved with Roths. The tax code can change on us. In a Roth you are paying upfront for a deferred benefit. If the tax code changes, you paid upfront for a benefit that might be reduced. In a traditional IRA, there's little extra harm that can happen to someone as one gets the full benefit upfront.