February 2008
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Cost: $9,000 to $26,000
Roth IRAs and Roth 401(k) plans can protect you from likely future tax hikes, because you pay taxes on your contributions today rather than when you withdraw them. The earnings on the account are also tax-free. We assumed a 40-year-old worker earning $70,000 a year starting in 2008 and projected increases in plan contribution limits through 2028. We then computed how much our worker would build up over 20 years if he or she contributed a typical 7 to 8 percent of salary to a Roth or traditional retirement plan.
If today's 25 percent tax rate rises to 40 percent by 2028, the Roth-type account would leave our model saver $26,000 richer than the traditional one. If the 25 percent tax rate rises to 30 percent, the Roth-type account would come out $9,000 ahead.
What you can do. Don't bet against Congress' power to raise taxes. But if you're in a high tax bracket now and expect to be in a lower one in retirement, a Roth might not be as beneficial. You can learn whether you're eligible for a Roth at www.irs.gov.
