THE NEW RULES OF RETIREMENT SAVING • 51
about 5–10 percent less than what I make today. So my tax rate isn’t going to be lower when I retire than it is now. And it certainly isn’t going to be lower than when I was deferring all those taxes making $50,000 a year. If you have a successful career and increase your income be- tween now and retirement, the same could be true for you. You don’t have to take my word for it. When Does It Make Sense? You’ve probably heard of T. Rowe Price, a popular investment firm. The company recently did some research I found very pow- erful: it helped analyze the risk of saving tax-free vs. tax-deferred. Let me give you the headline from the study, and then we’ll work backward to how they arrived at it. Here it is: “When it comes to retirement, nearly everyone under the age of fifty is better off saving tax-free rather than tax-deferred.” If that doesn’t sound earth-shattering to you, consider this: if you’re currently saving in a tax-deferred account (like a 401(k) or IRA), you could be giving up double-digit percentages of retirement income using that approach, according to the study. All right, so what exactly did the T. Rowe Price study find? Check out the chart from the study. It tracks the same hypothetical savings pattern through various ages and tax scenarios to deter- mine whether a tax-deferred plan (IRA) or a tax-free plan (Roth IRA) would provide more income in retirement. As you can tell, the tax-free savings approach wins nearly all of the time.
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