When you open a brokerage account to save for your retirement, you need to decide what type of account to open. For most people, that means a Traditional IRA or a Roth IRA.
Making a choice can be complicated, but personal finance expert Dave Ramsey believes there is a key factor that can guide you to the brokerage account that’s best for your situation.
Here is that factor.
This is the key to choosing the best brokerage account, according to Dave Ramsey
In “Dave Ramsey’s Guide to Investing,” the personal finance guru provided a clear measure for choosing between traditional IRA accounts and Roth IRA accounts. Ramsey says to take your income and your tax bracket into account when deciding what type of brokerage account is right for you.
The reason? Assess whether your tax rate is likely to increase or decrease.
If you plan to win Following income as a senior than what you earn now, you probably expect your tax bracket to be higher in the future. (People who earn more are taxed at higher rates.) On the other hand, if you plan to earn less With retirement income that you don’t currently earn, you can probably expect to fall into a reduced tax bracket, again due to the progressive nature of the US tax system.
This is not a guarantee, since the government could increase taxes on everyone in the future – even low incomes. This could happen if the national debt gets out of hand or if the government funds programs with higher taxes. Nonetheless, an assessment of future income can give a good idea of the likelihood that your tax bracket will be lower or higher.
Changing your tax bracket is important in choosing a brokerage account for one simple reason: some brokerage accounts offer initial tax relief, while others carry over your tax savings.
If you expect to be taxed at a higher rate today than in the future, you want your tax deduction when you work and invest for your retirement. A traditional or 401 (k) IRA allows you to do this, since you invest with pre-tax funds and then pay taxes when you withdraw the money in retirement. If you downgrade, paying that lower rate in the future would be cheaper.
If the reverse is true and you expect your income and your tax bracket to be higher in retirement, you might want to invest in a Roth. You are now investing with after-tax dollars. You don’t get any tax savings in the present, when you pay a lower rate, but you can make tax-free withdrawals as a retiree – without worrying about paying taxes at your higher rate.
Taking Ramsey’s advice is a good idea in this situation, as considering your current and future tax bracket can help you make the most of your tax savings opportunities. Take some time to think about this question and open the brokerage account that’s right for you.
