We answered this question last week. A Roth just allows you to pay taxes now instead of later. So if your tax bracket now is higher than it will be in retirement then DO NOT make a Roth contribution.
The cliffhanger (too generous?) was - "But what about all that tax-free growth in a Roth? Surely, that's a better deal, right?"
Let's explore that.
Once you put money into a Roth, it grows tax-free forever. You never ever pay taxes on that money again. Surely paying taxes on a small amount now is better than paying taxes on a big amount later.
It's as intuitive as a flashing Walk/Don't Walk sign. Except it's not correct.
To prove I'm not taking crazy pills, here's some very simple (I promise) math:
You have $10,000 to put in a Roth 401k or a Traditional 401k.
TO ROTH: To put it in the Roth, you must pay taxes on it first - let's say 20%. So $8,000 actually goes into the Roth. It doubles over the next 10 years and now you've got $16,000.
NOT TO ROTH: If you put it in a Traditional 401k instead, you don't pay any taxes now. So all $10,000 goes in. It doubles in 10 years to $20,000. But NOW you've got to pay your 20% in taxes….which….drum roll….leaves you with $16,000.
!?!?!?!?! *mind explodes*
So full circle… the only consideration when deciding "To Roth or Not to Roth" is whether your tax bracket will be higher now or later.
P.S. This does not apply when considering a non-deductible Traditional IRA vs. a Roth IRA. For that one, talk to your guy/gal. Don't have one? Then contact us!