Tuesday, September 30, 2014
Roth IRAs appeal to investors in the early stages of their careers that expect to pay taxes at a higher rate in retirement; however, older investors may want to use Roths to generate more retirement income than they could with a traditional IRA.
Although the strategy may work well in certain circumstances, the advantages for investors saving with a Roth could be small. New research by T. Rowe Price Group indicated that investors in their 50s and early 60s who pay taxes at a lower rate in retirement can fare better in a Roth.
Even if you do not know what your tax rate will be, a Roth can be useful. By having money in both Roth and traditional accounts, you may be able to diversify your tax exposure so not every cent of your retirement savings is taxed at whatever rate a future Congress may set for ordinary income. Furthermore, tax free Roth distributions will not trigger taxes on Social Security benefits, as can sometimes occur with withdrawals from a traditional IRA or 401(k).
See Walter Updegrave, The Roth-IRA Math for 50-Somethings, Fox Business, Sept. 26, 2014.