When younger professionals are in the early years of their career, they should strongly consider investing a portion of their income into a Roth account. In the early years of their career, income levels are generally lower and as a result their tax bracket will also be lower. As professionals advance in their career, income should grow; thus raising the individual into a higher tax bracket. In a lower tax bracket, individuals don’t gain as much tax break therefore the Roth is a more attractive investment vehicle when retiring after age 59 ½ as withdraws are tax free and not subject to the minimum distribution rules . In addition, most professionals will likely be in a higher tax bracket when retiring compared to when they started their career, so pay the tax up front when earning levels and taxes are lower.
As income growth puts these professionals in a higher tax bracket it becomes more attractive from a tax savings perspective to invest in a 401 K. Taxation will occur on withdraws when retiring after age 59 ½ and will be subject to minimum withdraws at age 70 ½,but in most cases; people will find themselves at the same or lower tax bracket by this time .What really is happening is tax payments are being postponed until later years and the benefit is that the investment grows tax free during those years before withdrawing at retirement.
Take some time and give it some thought; you do have options when investing for retirement.
Author: David A. Kinka, CPA, Chief Financial Officer