Q: Investing in a Roth IRA seems to make the most sense when I'm in a low tax bracket. Now that I'm starting to make more money, does it make more sense to switch my contributions to a traditional IRA?
Your current tax rate is definitely a big factor in your retirement account choice.
A traditional IRA gives you your tax break now.So, contributing to a traditional IRA is a bigger tax break for people in higher tax brackets.
On the other hand, a Roth IRA gives you your tax break after retirement, so it makes more sense for people who are currently in the lower tax brackets.
If you're still relatively young, there's no way to accurately predict what the tax brackets will look like when you retire, or how much income you'll have. However, as a general rule, a Roth is usually the best choice -- purely from a tax-savings perspective -- for people in the bottom (10% and 12%) two tax brackets, where roughly half of the U.S. population falls.
It's also important to point out that Roth IRAs have a few benefits that traditional IRAs don't. For one thing, you can withdraw your Roth contributions early without penalty, so it can be a great choice if you're hesitant to keep your money tied up until you're 59 1/2. Roth IRAs also have no minimum distribution requirements when you get older, and also have no maximum age to contribute, unlike the traditional IRA. There are also significant differences in the income limitations for both account types.
While your current and expected future tax rates are key factors when deciding between Roth and traditional IRAs, be sure to consider the other differences as well.