Most people think they’ll be in a lower tax bracket when they retire, but this isn’t always true. And if you make the right financial moves during your working years, it almost certainly won’t be true.

The case for the Roth.

When you stop and consider the many tax breaks you’re likely to lose later in life, you can see why:

Tax breaks you’re likely to lose in, or close to, retirement:

• Deduction of mortgage interest
• Tax deferred 401(k) contributions
• Tax deferred 529 account contributions
• Tax credits for child dependents
• Deduction of Student loan interest

There are many other examples, but you get the idea – you’ll be paying more taxes later in life even if tax rates remained unchanged.

Speaking of tax rates, here’s why tax rates are certain to be higher in the future than they are now:

• The current income tax rates are very low from an historical stand point.
• Federal and State deficits continue to grow at alarming rates.
• The already record Federal deficit is only expected to continue growing for the foreseeable future, as Congress continues to spend money they don’t have.

In addition to paying more taxes, you’ll also have required distributions from 401(k) and similar retirement accounts that may push you into higher tax bracket.

All of this serves as a terrific recommendation for a Roth IRA, because in a Roth IRA, it’s the contributions that are taxed, not the withdrawals. So you’re paying taxes at today’s rates, and when you withdraw your money at a later date, you avoid the crushing tax burden. Also, there are no required distributions, which means if you don’t need the money you can leave it to grow, or leave it to your heirs as an inheritance.

Converting a traditional IRA to a Roth IRA.

You can convert a traditional IRA to a Roth IRA, but there are tax implications and income limitations you should know about. You will owe taxes on the amount you are transferring, so be sure to have cash on hand to pay for the tax bill – if you pay for it out of the IRA balance, you might incur an additional 10% penalty for early withdrawal.

For 2009, you must have a gross adjusted income of less than $100,000 to open a Roth IRA, but those income limits disappear in 2010. So, if your AGI is higher than $100k, it’s best to wait a few months.

A perfect marriage?

Often times discussion about the Roth vs traditional IRA is an either-or proposition, but it may be beneficial to have both.

Here’s why:

You can keep the traditional IRA and open Roth IRA, max out your Roth first, then your traditional IRA. Then, in retirement, you take your mandatory distributions from the traditional IRA as your base income. This is taxed as income, but you can then supplement your income with Roth IRA withdrawals that are tax-free.

This strategy also gives you the flexibility to keep your money in the Roth to continue growing if you don’t really need it as income at that time.

• Make Your Grandchild a TAX-FREE Millionaire! I just got a Bottom Line Magazine offer in the mail, and thought I needed to blog about this one of the "smart money tip" inside. The tip is titled "Make Your Grandchild a TAX-FREE Millionaire!" and they include this nice chart showing a lump sum investment growing skyward to......
• Investing for free in 2010 with ING Direct! Here's a freebie for your Friday... Open an IRA & invest for FREE in 2010! ING Direct is offering a year's worth of investing credits if you open an IRA with them before April 15, 2010. Here are the details: no-fee IRA free Automatic Investment Plan (AIP) credits to use......
• 3 Options for College Saving Accounts. It seems counter intuitive, that choosing the wrong kind of savings account for your child's college fund could actually cost your child more, but that's the world we live in - make the wrong choice, and your child may lose thousands of dollars in financial aid come enrollment time. According......
• NLY, a Dividend Paying Trust Worth A Look. With chatter about a bubble in bonds building, it may be a good time to look for alternative sources of investment income. One such source has long been dividend paying stocks, trusts and partnerships. Here are two such dividend plays - one is a Real Estate Investment Trust, and the......
• Best Funds To Invest In Now. These are peculiar times we find ourselves in. Here's a list of funds from Kiplinger that not only cover just about every bogeyman bandied about in the financial press these days, but hit upon some classic needs in a mutual fund as well. Inflation protection Sooner or later, the reckless......

• how to choose a retirement strategy - or not Are you the type of person who gets excited about new ventures? Do you like a challenge?  Many people have an 'ah-ha' moment when they decide to get out of debt, start living a frugal lifestyle and aim towards financial freedom instead of pursuing the  accumulation of stuff.  One......
• Setting up a Roth IRA - 4 Easy Steps (part 1) I haven't really talked about my investments yet because I am focused on debt reduction right now...that will hopefully change soon.  Notwithstanding my situation, my younger brother had asked me to set up his "retirement account(s)."  He would go crazy if he knew I was writing what I did for him......
• Roth 401K, Roth IRA, 401K Retirement Plans: Which is Best? The Roth 401 (k) plan is a new form of retirement account combining the Roth IRA (k) plan and the regular 401 (k) plan. It has bits of both plans which allows the employee to have more flexibility when planning out his retirement as long as his employer agrees......
• The Last Chance Millionaire I recently received a review copy of The Last Chance Millionaire, It’s Not Too Late to Become Wealthy (affiliate link) by Douglas R. Andrew, which has a publication date of June 12, 2007 in hardcover. I'll be passing along my review copy to a random commenter. If you'd like a......
• Money Management Tip – Always Check for Errors Money management tips come in all shapes and sizes. Some relate to complicated matters like maintaining a diversified investment portfolio or maximizing your retirement plan contributions by taking advantage of employer matching contributions. Other money management tips, however, can be very simple. In fact, one of the simplest tips I’ve......