Stop Basing Your Retirement Savings on This Outdated Assumption
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The Motley Fool

Stop Basing Your Retirement Savings on This Outdated Assumption

January 28, 2022
08:58 AM
4 min read
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Market analysis reveals The type of retirement account you choose to invest in will make a huge impact in how you access your money -- and how much income your...

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4 min read

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investment

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Published

January 28, 2022

08:58 AM

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The Motley Fool

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Key Topics
investmentmoneyfinancialfinancialstechnologymarket cyclesseasonal analysispolicy

Market analysis reveals The type of retirement account you choose to invest in will make a huge impact in how you access your money -- and how much income your account vides -- once you become a senior

Unfortunately, far too many people end up selecting an account int to secure their future based on an assumption that may very well be incorrect

Nevertheless, Image source: Getty Images, given current economic conditions

Are you making this faulty assumption when deciding which retirement account is best for you

However, On the other hand, Far too many people opt to invest in a traditional 401(k) or IRA based on an assumption they make their taxes

Specifically, both workers and many financial experts firmly believe that retirees are ly to end up in a lower tax bracket

Additionally, If this is the case, a traditional account ly makes the most sense because it vides an up-front tax break, given current economic conditions

Furthermore, Roth accounts, on the other hand, defer tax savings until later (quite telling), in this volatile climate

With traditional accounts, contributions are deducted from taxable income in the year you invest in your account, given the current landscape

At the same time, So if you're in the 22% tax bracket, you'd up to $220 on your tax bill for each $1,000 invested in one

With Roth accounts, you don't get to deduct contributions, considering recent developments

You nothing on each investment in the year it's made (fascinating analysis)

But you benefit from tax-free withdrawals

At the same time, If you expect your tax rate to fall to 20% as a retiree, you'd up to $200 for each $1,000 withdrawn

On the other hand, Additionally, This's less than the $220 in savings a traditional account could offer, so you'd be better off with the up-front savings, given current economic conditions

Furthermore, The only blem: The assumption that your tax rate will fall could very well be wrong

Why you can't count on your tax rate going down There are a few big blems with assuming you'll automatically be in a lower tax bracket as a retiree

Moreover, First and foremost, many people think they'll end up in a lower tax bracket because their income will be lower in retirement (quite telling)

Furthermore, However, But this isn't necessarily the case (an important development)

Many retirees spend as much, or more, than they did before leaving the workforce

Nevertheless, If your taxable income in retirement is close to the same as it was while working, you can't assume you'll be in a lower tax bracket later (remarkable data)

Second, there's a good chance the government will raise taxes as time goes on

Tax increases are ly because: Rates are very low right now by historical standards

Younger generations have generally expressed more support than older generations for government grams that would require tax increases to support them, considering recent developments

As this demographic group takes more political power, an expansion of government may lead to higher taxes

An aging population will raise the cost of grams such as Social Security and Medicare, requiring more government support (this bears monitoring), given the current landscape

The deficit and debt are both growing, and paying them down may eventually become a bigger priority

Since there's solid reason to believe tax rates may rise across the board, many future retirees may end up in a higher tax bracket even if their income does go down

As a result, it's best not to assume that traditional accounts are always going to vide more tax savings

Moreover, Instead, you may want to hedge your bets by putting some money in both traditional and Roth accounts

Or you may want to do a little more re into determining how your personal tax situation is ly to change over time so you can develop an individualized apach that's right for you (which is quite significant).