It's hard to find fault with Roth IRAs (and newfangled Roth 401(k) plans). With a traditional IRA, you invest pre-tax money, reduce your current tax bite, and have your ultimate withdrawals taxed. Fair enough, it seems. But with a Roth, you invest post-tax money, get no immediate tax benefit, but ultimately get to make withdrawals tax-free. That can be a big deal -- and much more attractive, especially if your investments have a lot of time to grow into a substantial nest egg.
The tax vs. no-tax issue is just one reason to favor the Roth, and if tax rates rise, that comparison might soon become even more pronounced.
There are several credible reasons why taxes might increase in coming years. For one thing, many companies are phasing out or eliminating underfunded pensions, which may leave taxpayers footing the bill. Those companies' obligations will get dumped on the Pension Benefit Guaranty Corp. (PBGC), which is government-sponsored and underfunded itself.
My colleague Robert Brokamp tackled this topic recently in "The End of Retirement," noting that "bankruptcies are becoming an acceptable way for companies to get out of their pension obligations." Many companies have troubling pension situations, including Goodyear (NYSE: GT ) , Alcoa (NYSE: AA ) , DuPont (NYSE: DD ) , Motorola (NYSE: MOT ) , and Electronic Data Systems (NYSE: EDS ) . Meanwhile, some companies, including IBM (NYSE: IBM ) and FedEx (NYSE: FDX ) , have reduced or eliminated their traditional pensions.
Meanwhile, our military activities in Iraq and elsewhere are consuming a lot of funds, and our government's spending has not been reined in. For Social Security to pay future retirees what it pays their current counterparts, it will need some kind of financial infusion. Factors such as these suggest that sometime in the coming years, taxes will likely rise. As they do, they'll grab more and more of your withdrawals from traditional IRAs.
It's not great news, but it's news you can put to use, perhaps by shifting more money into Roth IRAs and Roth 401(k)s. Begin your decision process by learning more in our IRA Center, our 401(k) nook, and in these articles:
And by the way, we'd love to help you plan and save effectively for your future, via our Rule Your Retirement newsletter, which you can try for free. A free trial will give you full access to all past issues, allowing you to gather valuable tips and even read how some folks have retired early and well. It regularly offers recommendations of promising stocks and mutual funds, too.
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. FedEx is a Stock Advisor recommendation. Try any one of our investing services free for 30 days. The Motley Fool is Fools writing for Fools.