It is difficult to talk about taxes and retirement since individual circumstances differ and tax rates and tax programs will change over your investing lifetime. But I will plunge ahead with the hope that some will find my general comments useful.
There are presently three basic choices when you are investing for retirement; you can save in a taxable account, in a tax-sheltered account, or in a Roth account.
In a taxable account, you pay taxes on the money earned before it is invested (at the tax rate depending on your income) and you pay taxes on capital gains as they are earned (presently at the maximum rate of 15%).
In a tax-sheltered account, you pay no taxes on the money earned before it is invested, but pay taxes on the total as it is withdrawn (at the tax rate depending on your income). It is sometimes assumed that you will be withdrawing the money during retirement at a lower tax rate, but if you save and invest effectively, this might not be true. You are able to invest the government's share of your income for many years, but in return you give up the capital gains tax rate.
In a Roth account, you pay taxes on the money earned before it is invested (at the tax rate depending on your income), but then you pay no taxes on any of the gains over the years. In addition, a Roth account does not require withdrawals as the case with a tax-sheltered account. In general, the Roth account is a great deal, and the longer you invest the better it becomes. However, if future tax rates are significantly reduced or if you will be in a low tax bracket during retirement, then a tax-sheltered account is relatively more competitive. There are also tighter limitations on contributions to a Roth account than to a tax-sheltered account. As an example, while working, I was able to tax shelter a significant amount of money but was not able to put much money in a Roth.
In retirement, we are living from funds in our taxable accounts and, thus, can control our income. This allows us to roll funds from an IRA into a Roth account, pay taxes at a relatively lower tax rate, and invest the money in a Roth account where future gains will not be taxable. James Lange (www,paytaxeslater.com) is one of the strongest proponents of this strategy.
A Roth account is a great opportunity for every individual; however, I am not certain what the implications might be for our country as a whole. If you invest in a tax-sheltered account, you avoid paying taxes now, but the government is certain to get its share of the original investment and all the gains at a later time. Moreover, the rules require you to begin withdrawals (and begin paying the government) at age 70, and, if taxes were increased, the government would get an even larger share. In a Roth account, the government has no claim on your gains. This is obviously good for you. But what are the implications of an increasing amount of money insulated from taxes and fewer people working as the population of the country ages? Since the U.S. already faces deficits well past my lifetime, I would expect inflation as a likely outcome. Though taxes might not devalue your Roth account, inflation might.
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