Page 90 - The Informed Fed--Hearn (edited 10.29.20)

the phase out scale. Examples include the child tax credit, the earned
income credit or the student loan interest deduction.
A taxpayer who chooses to make a Roth IRA contribution (instead
of a traditional IRA contribution or tax-deductible retirement account
contribution) while in a moderate or high tax bracket will likely pay more
income taxes on the earnings used to make the Roth IRA contribution.
This is compared to the income taxes that would have been due to be
paid on the funds that would have later been withdrawn from the
traditional IRA, had the taxpayer made a traditional IRA contribution.
This is because contributions to traditional IRAs or employer sponsored
tax-deductible retirement plans result in an immediate tax savings equal
to the taxpayer’s current marginal tax bracket multiplied by the amount
of the contribution. It has been shown that many people have a lower
income in retirement than during their working years, and thus end up
in a lower tax bracket in retirement. This is another reason why
withdrawals from a traditional IRA or tax deferred retirement plan in
retirement are likely to result in a lower tax bill. The higher the taxpayer’s
marginal tax rate, the greater the disadvantage.
A taxpayer who pays state income taxes and who contributes to a
Roth IRA (instead of a traditional IRA or a tax deductible employer
sponsored retirement plan) will have to pay state income taxes on the
amount contributed to the Roth IRA in the year the money is earned.
However, if the taxpayer retires to a state with a lower income tax rate,
or no income taxes; then the taxpayer will have given up the opportunity
to avoid paying state income taxes altogether on the amount of the Roth
IRA contribution by instead contributing to a traditional IRA or a tax
deductible employer sponsored retirement plan. This is because when
the contributions are withdrawn from the traditional IRA or tax
deductible plan in retirement, the taxpayer will then be a resident of the
low- or no-income tax state, and will have avoided paying the state
income tax altogether as a result of moving to a different state before the
income tax became due.

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