Worried Tax Rates Will Rise Over Time? Here's One Account Worth Saving In

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  • Tax rates have the potential to climb through the years.
  • One account can make it so tax hikes aren't a problem.
  • With a Roth IRA, you pay taxes upfront but won't have to pay taxes on the withdrawals you take in retirement.

There is a way to protect yourself from future tax hikes.

Taxes are something we all have to deal with. And many people find our tax system frustrating, namely because the higher your earnings, the higher a tax bracket you fall into.

As a refresher, the U.S. tax system is a marginal one. This means you pay less tax on your lowest dollars of earnings and more tax on your highest dollars of earnings. When we talk about tax rates and brackets, we're talking about the amount of tax you pay on your highest earnings.

One of the tricky things about tax rates is that they aren't set in stone. Right now, for example, the top tax rate or bracket is 37%. You have to be a really high earner to fall into that bracket. But let's say a new administration takes over and decides to overhaul the tax system. That could result in the top tax bracket rising to, say, 42%. That's a big difference.

Meanwhile, tax rate changes could affect more than just the wealthy. Right now, if you're single earning $75,000 a year, you fall into the 22% tax bracket. This doesn't mean you pay that rate on your entire salary, but rather, your top dollars of earnings. If lawmakers change tax brackets in the future, your $75,000 income might put you in the 25% tax bracket instead, thereby forcing you to send more of your money to the IRS.

Without a crystal ball, it's impossible to know what the future holds for tax rates. But if you're worried they'll go up over time, there's one account to consider putting your money into.

Get some protection against tax hikes

You'll need a solid nest egg if your goal is to enjoy a comfortable retirement. And when it comes to saving for your later years, you have choices. You could put money into a traditional IRA and enjoy a tax break on your contributions. Or, you could forgo that immediate tax break and save in a Roth IRA instead.

The upside of saving in a Roth IRA is that withdrawals are tax-free. So by saving in one of these accounts, you can protect yourself from future tax hikes.

Let's say you fall into the 32% tax bracket right now. If you put money into a Roth IRA, you'll effectively lock in that tax rate on your money, because even if you land in a higher tax bracket in retirement, you won't pay taxes on your Roth IRA withdrawals.

Tax rates aside, you may not want to deal with the financial stress of having to pay taxes on a chunk of your retirement income. And if that's the case, putting money into a Roth IRA is a solid bet.

It pays to consider a Roth IRA

Some retirement savers favor traditional IRAs because they want an upfront tax break on their contributions. And to be fair, some people need that tax break in order to afford their contributions.

But if you're willing and able to give up that immediate tax break, funding a Roth IRA could really work to your benefit if tax rates rise a lot down the line. And keeping your money in a Roth IRA could also buy you a lot of peace of mind -- both throughout your working years as well as retirement.

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