Dave Ramsey Says This Is How to Decide What Brokerage Account Is Right for You

There's one key factor to consider.

When you open a brokerage account to save for retirement, you have to decide what type of account you should open. For most people, this means a traditional IRA or a Roth IRA.

Making the choice can be complicated, but personal finance expert Dave Ramsey believes there's one key factor that can guide you towards the brokerage account that makes the most sense for your situation.

Here's that factor.

This is the key to picking the best brokerage account, according to Dave Ramsey

In "Dave Ramsey's Guide to Investing," the personal finance guru provided a clear metric for choosing between traditional IRA accounts and Roth IRA accounts. Ramsey says to consider your income and tax bracket when deciding what kind of brokerage account is right for you.

The reason? Assessing whether your tax rate is likely to go up, or likely to go down.

If you expect to earn more income as a senior than you currently earn, then you probably expect your tax bracket to be higher in the future. (People who earn more are taxed at higher rates.) On the other hand, if you expect to earn less income in retirement than you currently earn, you can probably expect to drop into a reduced tax bracket, again because of the progressive nature of the U.S. tax system.

This isn't a guarantee, since the government could raise taxes on everyone in the future -- even lower earners. That might happen if the national debt gets out of control, or the government funds programs with higher taxes. Still, an assessment of future income can provide good insight into whether your tax bracket is likely to be lower or higher.

The change in your tax bracket is important in choosing a brokerage account for a simple reason: Some brokerage accounts provide an upfront tax break, while others defer your tax savings.

If you expect to be taxed at a higher rate now than in the future, you want to take your tax deduction when you are working and investing for retirement. A traditional IRA or 401(k) allows you to do that, since you invest with pre-tax funds, then pay taxes when you withdraw the money in retirement. If you drop to a lower bracket, paying that lower rate in the future would be cheaper.

If the reverse is true and you expect that your income and tax bracket will be higher in retirement, you'd want to invest in a Roth. You invest with after-tax dollars now. You don't get any tax savings in the present, when you're paying a lower rate, but you can make tax-free withdrawals as a retiree -- without worrying about paying taxes at your higher rate.

Following Ramsey's advice is a good idea in this situation, since considering your current and future tax bracket can help you make the most of your tax savings opportunities. Take a little time to consider this issue, and open the brokerage account that's right for you.