As the end of the year approaches, smart taxpayers are looking for ways to cut their tax bills. One smart strategy involves opening an IRA, but figuring out which type of IRA is right for you can be complicated.
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at the question of how to pick between regular and Roth IRAs. Dan notes that only regular IRAs give you an upfront tax deduction to cut your tax bill this year, but Roth IRAs give you long-term tax benefits including tax-free treatment when you make withdrawals from your account in retirement. Dan identifies the key question as whether your current tax rate is higher or lower than your likely tax rate in retirement, with Roth IRAs being smarter if you're currently in a low bracket but regular IRAs looking better if your current tax rate is high.
Dan concludes with a look at how dividend ETFs SPDR S&P Dividend (NYSEMKT:SDY), iShares DJ Select Dividend (NYSEMKT:DVY), and Vanguard Dividend Appreciation (NYSEMKT:VIG) can help you make best use of the tax deferral from both types of IRAs. For Roths, though, high-growth stocks also make a lot of sense to take advantage of the tax-free income they offer.
Fool contributor Dan Caplinger owns shares of Vanguard Dividend Appreciation and iShares DJ Select Dividend. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.