Question

Kyle anticipates that he will be in a higher tax bracket when he retires than he is in now. For Kyle, an IRA would be a better choice if he wants to pay less tax, since the tax will be collected when he funds. Which of the following options correctly completes the sentence?

1) Kyle anticipates that he will be in a lower tax bracket when he retires than he is in now.
2) Kyle anticipates that he will be in the same tax bracket when he retires as he is in now.
3) Kyle anticipates that he will be in a higher tax bracket when he retires than he is in now.
4) Kyle anticipates that he will not be in any tax bracket when he retires.

Answer 1

Kyle would prefer a Roth IRA over a Traditional IRA if he expects to be in a higher tax bracket when he retires, since Roth IRA contributions are taxed now and withdrawals would be tax-free in retirement.

Step-by-step explanation:

If Kyle anticipates he will be in a higher tax bracket when he retires than he is in now, he might prefer a Roth IRA over a Traditional IRA. With a Roth IRA, contributions are made with after-tax income, meaning the taxes are paid now rather than during retirement. This is beneficial if Kyle expects his retirement tax rate to be higher than his current one because his withdrawals, including investment gains, will be tax-free assuming certain conditions are met. On the other hand, with a Traditional IRA, contributions may be deductible, thereby reducing taxable income during the current tax year, but distributions in retirement will be taxed as ordinary income. Therefore, if Kyle anticipates being in a higher tax bracket in the future, he would not want the Traditional IRA scenario where the taxes are deferred until funds are withdrawn at potentially higher rates.