Thursday, October 18, 2007

Roth or Traditional IRA For Our Children?

Is it better for my daughter to use a Roth, where withdrawals are tax free, or a Traditional IRA, where contributions are tax deductible, for retirement savings? The answer is, "It depends" on whether one's retirement tax rate is higher, lower or equal to one's tax rate during time one is contributing. Below is a table showing the recommended choice.

IRA Choice For Higher Return
Tax Rate in RetirementRoth IRATraditional IRA









In a previous post on choosing between a Roth or Traditional IRA , I showed that a Roth had a better return when the tax rate was the same after retirement. In The Best Retirement Deal by Walter Updegrave, he agrees with the equal tax rate analysis and shows the results for both lower and higher tax rates after retirement. His conclusion is that one cannot predict future tax rates and therefore, should put some retirement funds in a Roth IRA.

Being somewhat pessimistic, I expect that my daughter's tax rate will likely be higher after retirement than in her working years. Therefore, I would recommend putting savings in a Roth IRA if she qualifies. If she doesn't qualify for a Roth IRA, I would still have her put money into a non-deductible IRA.

For more on Crossing Generations, check back every Thursday for a new segment.

This is not financial, saving or retirement advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

1 comment:

We Are Wealthy - Tips To Become Rich said...

This entry in your blog provides some great information! I'm going to bookmark your blog so I can come back to it later. I've just started my own blog to try to help people get started managing their money. Keep up the good work!