Stop Basing Your Retirement Savings on This Outdated Assumption
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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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January 28, 2022
08:58 AM
The Motley Fool
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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 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At the same time, If you expect your tax rate to fall to 20% as a retiree, you'd up to $200 for each $1,000 withdrawn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).
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