How To Optimize Your Retirement Investing Priorities
At the same time, the economy might require higher tax rates in the future. We're benefiting today from the lowest tax rates in American history. This might be the time to pay taxes if you think the economy has no way to survive without higher tax rates in the future. The concept of favorable tax rates on long-term capital gains might disappear. And if you save and invest diligently, you may be able to generate more income than you expect.
There is a strong case for believing that the tax you're paying today might be the lowest rates you'll ever pay. Take advantage of that by investing in a Roth IRA. You don't get a tax deduction like you would with a traditional IRA, but you won't need to pay tax on your contributions or your earnings when you withdraw your Roth IRA funds in retirement. There's another assumption inherent in this: that the law surrounding Roth IRAs doesn't change.
Priority 3: Maximize contributions to your 401(k)
If you've maximized your Roth IRA, look back at your 401(k). By contributing more to your 401(k), you can take advantage of the tax benefits already mentioned. Because you already maximized your employer's matching contribution, the only benefit left is the tax deduction and tax-free growth of your investment. This is still something to take advantage to lower your tax bills today and throughout the rest of your income-earning life.
Not every employer offers a 401(k). The non-profit I used to work for eventually offered a similar plan, a 403(b), with the same benefits, but other employees might not be so lucky. If a 401(k) isn't available, you can fall back on a traditional IRA. Rather than investing the full $5,500 into a Roth IRA, split your total contribution between the Roth IRA and a traditional IRA. With a traditional IRA, you receive a tax deduction (subject to income limitations) and tax-free growth, like a 401(k).
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