For this post, I’m going to assume you understand what an IRA is and how a Traditional IRA differs from a Roth IRA, otherwise this will get too long. If that doesn’t describe you, take a look at my previous two posts: How much does an ira really save? and Isn’t a Roth (vs. Traditional) IRA usually a bad idea?.

### Information overload!? Just tell me what to do!

Here’s what I think you should do (with all the normal caveats about how I’m not a tax professional):

1. Contribute the maximum amount in an IRA (probably a Traditional IRA, but more on that later). Which means you should focus on the second graph.

2. Invest your IRA in something diversified - something like SPY. Adjust the expected average return rate slider (above) to something realistic given your choice. For SPY, it’s probably something between 3% and 8% (although that’s a huge range).

3. Adjust the current tax rate slider (above) to the correct value for you.

4. Keep the long-term cap gains slider at 15%.

5. Estimate your retirement tax rate. As I described in an earlier post, I think it’s highly likely that your retirement tax rate will be considerably less than your current tax rate.

6. Look at the second graph, specifically the point on the x-axis that you estimated for your retirement tax rate, and pick whichever type of IRA has a higher value! Q.E.D.

If I do all that, here’s what I come up with:

• Expected average rate of return: 5%
• Current tax rate: 35%
• Expected retirement tax rate: 25%
• Value of $8462 pre-tax contribution in Roth IRA = ~$39,000
• Value of $8462 pre-tax contribution in Traditional IRA = ~$41,000