I Used to Think a Traditional IRA Was Better. Here's Why I Changed My Mind.

For many years, when I invested for retirement, I favored a traditional IRA rather than a Roth IRA. Both accounts have a combined contribution limit, so, like all retirement savers, I had to choose how to allocate my dollars between the two. For me, a traditional account seemed like a no-brainer.

However, I recently changed my mind and decided to make a switch. Here's why.

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1. I decided I'd rather claim my tax savings later

One of the biggest differences between a traditional IRA and a Roth IRA is the tax treatment given to each account. The two retirement plans both come with tax breaks, but traditional IRAs allow you to claim your tax savings in the year you make contributions. A Roth IRA requires you to invest with after-tax dollars, but you can take tax-free withdrawals in retirement (provided you follow the rules for qualified withdrawals).

I was initially pretty clear that I wanted the upfront tax savings because my tax rate is fairly high right now, since my husband and I both have good jobs. I assumed that as I got older and moved into retirement, my income would probably decline, so I'd be in a lower tax bracket later. Claiming the tax break now when I'm paying a higher rate seemed like the better choice.

However, I've since reevaluated what I think is going to happen to my tax bill. The reality is, the government is in a lot of debt. The population is also aging, so the costs of entitlement programs are rising. And tax rates right now are low by historical standards. With all these factors, I now think the odds are strong that tax rates, on the whole, will go up -- and perhaps substantially.

Since that would likely leave me with a higher tax rate in retirement, even if I'm making less, I've determined I'm better off waiting and getting my tax savings as a senior.

2. I want to avoid owing taxes on Social Security

The other big thing I realized is that I really want to avoid having my Social Security benefits subject to tax. And, unfortunately, the thresholds at which you trigger taxes on Social Security benefits are pretty low.

Your Social Security benefits are not taxed if your provisional income is below $25,000 as a single filer, and $32,000 as a married joint filer. Provisional income is half of Social Security, all taxable income, and some non-taxable income.

I'm going to have an income above those limits in retirement, and unfortunately, the thresholds won't be increasing since they are not indexed to inflation. This means I'd be looking at a tax bill on my benefits due to the impact that traditional IRA withdrawals would have on my taxable income.

Roth distributions, on the other hand, don't count when calculating whether you're above the limit, so if I switch to a Roth and can spend most of my retirement living off Roth distributions, then I may be able to avoid giving the IRS a cut of my Social Security checks.

For both of these reasons, a Roth is now the clear right choice in my situation.

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