Can somebody help explain at what Salary levels it makes sense to do a traditional IRA vs a roth IRA?
There's a simple sounding "rule" that turns out to not be so simple when you actually try to figure out what it means for you: If you expect your marginal income tax rate to be lower in retirement than it is while working then you should make deductible contributions (if allowed at your income level). If you expect your marginal income tax rate to be higher in retirement then you should make roth contributions. If you expect your marginal income tax rate to be the same in retirement, then it doesn't matter.
To illustrate, lets say you have $1000 spare and you're in the 25% bracket now, you're retiring next year, and the market will gain 10% this year (all overly simplified to make the math easy).
If you put it in a traditional IRA, you put in $1000, pay no tax on that money, and it grows to $1100 next year when you take it out. If you put it in a roth, you put in $750, pay $250 in tax on that money and have $825 next year when you take it out.
So, the roth provides $825 tax free income next year, the traditional provides $1100 of income, but this is taxed. If you're in the same (25%) marginal tax bracket, it would be worth $825 to you in after tax income: a tie. If you're in the 28% marginal bracket it would be worth $792: win roth. If you're in the 15% marginal bracket it would be worth $935: win traditional. You can do the math for more years invested, and you'll see the result is the same.
Where it gets tricky is figuring out what you marginal tax bracket is going to be in retirement. What other income streams will fill up the lower bracket (pension, social security, annuity, large existing deductible retirement plan contributions)? Will tax rates change? In which direction will they change? Will you live in a lower/higher income tax state than you do now (I left it out above, but it would have the same effect as lower/higher federal tax brackets)?
The long and short of it is that unless you expect to move to a higher income tax state, you expect tax rates to rise, or you expect a large increase in income before retirement (doctor currently in residency, etc), then chances are you'll be in a lower tax bracket in retirement, giving the advantage to traditional/deductible contributions. You certainly want at least enough in deductible contributions to fill up the standard deduction and the lower tax brackets, especially in early retirement when you likely won't have things like social security or a pension filling them up.
