To Roth or Not to Roth?

Roth IRAs are so, like, totally hot right now.

Year's almost up. Time to move if you want one. My favorite financial writer, Andrew Tobias, is enthusiastic about them and wrote about them on his (terrific) blog here and here and here.

A trusted Wharton-educated CPA friend is more leery. Take it away, leery trusted CPA friend:

1. The key question is "do you expect your marginal income tax rate when you are retired and making withdrawals from your IRA to be higher or lower than your current marginal income tax rate?"

If you expect your retired marginal income tax rate to be higher than your current rate, open a Roth IRA

If you expect your retired marginal income tax rate to be lower than your current rate, add to your traditional IRA.

I find it odd that so many people rushed out to open Roths. But if you are not working when you are retired, your marginal income tax rate would normally be lower than your current rate. Thus, a Roth IRA wouldn't make sense.

Also, eligibility to contribute to a Roth IRA phases out as your income increases. For Single filers: Up to $106,000 Modified Adjusted Gross Income (to qualify for a full contribution); $106,000-$121,000 Modified Adjusted Gross Income (to be eligible for a partial contribution)

2. If you have self employment income, a much better retirement vehicle is a self-employed 401k. That's because the amount you can contribute (thereby reducing your taxable income) is much, much higher. You need a bit of time to set this type of vehicle up and must do it by year end.