Wonder about the difference bewteen a Roth-IRA and a Traditional IRA?

When making a Roth contribution the amount does Not create a tax deduction.  But the earnings grow and are withdrawn tax free, under current law.

An IRA contribution results in a tax deduction. If you put $5,000 into an IRA you get a $1,000 back if your maginal tax bracket is 25%, as an example.

IRA withdrawals in retirement are taxable income at that time.

My general opinion is if you are in the 15% tax bracket you should do the Roth contribution and if you are in the 25% bracket you should make a Traditional IRA contribution. Why is that?

Some people mistakingly think "tax the seed don't tax the plant", and therefore do the Roth. I've read a ton of financial articles about this. If you run the numbers on the scenario, and your tax bracket at the time of contribution is the same as in retirement, the "present value" of the chain of cash flows, from contributions thru withdrawals, the result will be exactly the same in present dollar values. Therefore no difference. However, you are likely in a higher tax bracket when working than you will be in retirement.

Therefore the Traditional IRA gets the nod. But if you are in the 15% or lower tax bracket, your retirement income will likely be pushing into a 15% bracket sometime in the future. Therefore I would suggest the Roth for that situation.

One big important factor is to accumulate over your lifetime both Roth and Traditional IRA contributions. The reason being that IRA withdrawals in retirement increase your taxable income, which then can increase the tax on your social security benefits. It's like an "excise tax" on what would otherwise be, in current law, a non-taxable social security check. By having a mix of taxable and non-taxable accounts you can plan your retirement withdrawals to prevent or minimize the excise tax on your social security income.

So my general theme is to make Roth contributions in low taxable income years and regular IRA contributions (or larger SEP-IRA or Solo 401k contributions) during your higher tax bracket years.

You never know what your situation will be in 5 years, 10 or 15. Why commit to a tax now that may be forever avoided when circumstances change? Another scary aspect: currently municipal bond interest is generally tax free. But that tax free income DOES count towards the social security income excise tax. What if in the future tax law the same thing is applied to Roth accounts? In that case you have given up the investment savings of the Traditional IRA in favor of the Roth without all the Roth potential benefit. Another reason to favor the regular IRA over the Roth, except for those years when you have a low taxable income, for whatever future reason, tax credits, layoff, slow economy, high medical expenses, whatever. You just don't know what the future will hold for you. Take the tax benefit now is my general philosophy, and manipulate in the future as it unfolds. 

With the overall goal to have a mix of taxable and non-taxable accounts come social security age.

These aren't the only considerations, there are a lot more details involved that offer opportunites affected by your personal and unique tax or financial situation. Please consult your CPA about all your options.

For example, if you have enough income to save, you could have both a Solo 401k as well as the maximum Roth-IRA contributions in the same year!

IMPORTANT: If your income is near 100k, or if your employer offers a plan, please consult your advisor BEFORE making any Roth or IRA contribution!