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Roth IRA Magic

To Roth or Not To Roth?

To Roth or Not To Roth?
That Is The Question
Well I Have The Answer

Tell me, who knows what the income tax rate will be in 5 years, or 10 years, or 20 years, or 30 years? I sure don’t know.

The Traditional IRA and The Roth IRA each have some advantages and disadvantages, and they may vary depending on your present and future financial circumstances.

The Traditional IRA:

  • Saving money in a traditional IRA potentially gives you a discount on your income tax burden by reducing your taxable income up to the full amount of your contribution the year you contribute.
  • Your contributions grow tax deferred and are generally taxable when you begin to withdraw in retirement.
  • One negative is under today’s tax laws you must begin withdrawing money from your Traditional IRA under a pre-determined percentage schedule when you reach 70.5 or 72 depending on this schedule. (The new rule goes if you reach the age of 70.5 in 2019 or earlier, you must begin taking money out by April 1 of the following year. If you reach the age of 70.5 in 2020 or later, you must begin the RMD schedule [Required Minimum Distribution] by April 1 of the year after you reach 72.)  Clearly the Federal government’s intent of RMDs from your Traditional IRA is to deplete your IRA in retirement (and potentially collecting taxes from withdrawals)  whether you need the money or not.
  • Part or all of the money withdrawn in retirement may be taxable at ordinary income.

The Roth IRA:

  • Saving money in a Roth IRA will not give you a federal income tax discount on the contributions you make at all.
  • Your contributions grow tax deferred also and in fact when you begin withdrawing money in retirement under current tax laws your withdrawal is 100% federal income tax free.
  • An additional positive is under today’s tax laws you are not required to withdraw money from your Roth IRA at any time in retirement or in any specific amount each year. In other words the RMD does not apply to your Roth IRA.
  • None of the amounts you withdraw from your Roth IRA in retirement is taxable or subject to federal income taxes. This gives you much more flexibility and control of your money in retirement.

Contribution Limits For the Traditional IRA and Roth IRA for 2021 are $6,000 and if you are over 50, an additional catch up contribution of up to $1,000 may be made. 

*These limits are subject to your modified adjusted gross income level (MAGI) and marital status in the year you plan to contribute.

And the Answer is:

It might be best to have some money in both the Traditional IRA & the Roth IRA
but we will help you determine that further when we meet.

Happy Retirement!

Some Additional Notes on the Magic of the Roth:

Some Additional Notes on the Magic of the Roth:

  • Roth IRA Conversion: You can convert part or all of your existing Traditional IRAs or 401ks to a Roth IRA or Roth 401k. See me.

  • The Roth IRA bucket of your 401k: 401ks may now include a Roth 401k bucket for you to make contributions to. Many 401ks have added this feature to their plans. Most companies that have added this feature allow you to decide what percentage of your annual 401k contribution goes to each bucket, traditional or Roth, so you have that added control.
  • Solo 401ks: If you are self employed and have none or only one employee, your spouse, you may be eligible to open a Solo 401k. You have the option also of adding the Roth contribution bucket to your plan if you choose. See me for your Solo 401k plan creation and 5,000 plus investment possibilities including individual stocks, individual bonds, Individual Treasuries, ETFs, Index Funds, Mutual Funds, Real Estate, Managed Accounts, and more.

We should meet soon to discuss your Roth IRA/401k possibilities.

Traditional and Roth IRA Contribution Limits for 2020 and 2021

Single Filers (MAGI)Married Filing Jointly (MAGI)Married Filing Separately (MAGI)Maximum Contribution for individuals under age 50Maximum Contribution for individuals age 50 and older
under $125,000under $198,000$0$6,000$7,000
$140,000 & over$208,000 & over$10.000 & over$0$0

1. You may contribute simultaneously to a Traditional IRA and a Roth IRA subject to eligibility as long as the total contributed to all Traditional and/or Roth IRAs totals no more than $6,000 ($7,000 for those age 50 and over) for tax year 2020 and no more than $6,000 ($7,000 for those age 50 and over) for tax year 2021

Have a Question?

Thank you!