Retire without taxes

Only one savings plan gives you the chance to free yourself from taxes in retirement. Are you making the most of it?

3 of 12
3. How can I know my future tax bracket?
How can I know my future tax bracket?
Roth vs. regular IRA? The math changes if your tax rate moves. See what happens to $5,000 if you're in the 28% bracket today.
It's tough. Your future tax rate will depend, among other things, on the arc of your earnings over your career and what Congress does to tax rates.

Typically, you're in the lowest bracket you'll ever see when you're young and your income is modest, making the Roth a better bet. Even if you're in mid-career or later, don't assume you'll drop into a lower tax bracket. In retirement, much of your income will consist of 401(k) and IRA withdrawals and, possibly, a pension. But since you're no longer reducing your taxable income by contributing to 401(k)s and IRAs, you could end up in the same tax bracket, if not a higher one.

This uncertainty provides yet another reason to put at least some money in a Roth. The concept is simple: Just as it pays to spread your retirement savings among different types of stocks and bonds, it makes sense to diversify your tax exposure. You'll pay ordinary income tax on withdrawals from regular 401(k)s and IRAs. If your entire portfolio is in such accounts, you could lose as much as 35% to taxes. If Congress raises tax rates, your spendable income will shrink even more.

Funding a Roth allows you to hedge that risk. It also gives you more flexibility to manage your tax bill. If a larger-than-usual one-time withdrawal from your 401(k) will push you into a higher tax bracket, you can avoid the bigger tax hit by pulling tax-free money from your Roth instead.

NEXT: Will Congress take away the tax benefits?
Last updated September 16 2008: 11:34 AM ET
Source: Money research.
Note: Roth investment is after-tax, or $3,600.
More Galleries
Our biggest money highs and lows How much money do you need to feel rich? What are your biggest money mistakes? Money magazine surveyed 1,000 Americans for the answers to these and other questions. See how your answers stack up. More
How we feel about our finances Participants in an exclusive Money magazine survey reveal how they feel about their finances. Although the Great Recession may be over, they're not all that confident about their prospects for the long run. More
8 ways to cut your tax bill To keep your tax bill as low as possible this filing season, you need to stay on top of all the ways the rules have changed. More

Special Offer
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.