Traditional or Roth IRA?
Retirement savings can be complicated, especially when it comes to understanding how they’re taxed.
In traditional retirement accounts, you don’t have to pay taxes on your contributions. The money grows tax-free until you withdraw it in retirement and that’s when you’re taxed.
With a Roth IRA, your contributions are taxed now, and your withdrawals later are tax-free.
The whole idea of investing is to put in a little and take out a lot. The question is: where would you rather pay taxes? On the small amount you put in now, or the larger amount you take out later? I know which one I would pick.
It is never too early, or too late, to consider the benefits of different types of retirement accounts. I often see people make decisions based on the thinking that they just need to make it TO retirement. The reality is that you need a strategy to carry you through, long AFTER you retire. After all, that could be another 20 or 30 years! So you need a long-term perspective.
We can look at your unique situation and offer a game plan. For example, we could implement a Roth Conversion strategy*, transferring funds from a traditional to a Roth account, where you only paying taxes on the converted amount. The earlier you do a conversion, the more time it has to grow.
But even if you are in your 50s and 60s, Roth conversions can help reduce Required Minimum Distributions– or RMDs– in your 70s and beyond.
Financial strategies in general work best when adopted early on. Imagine setting money aside for retirement is like putting a ball in your pocket. Starting early is like putting a small marble in your pocket - hardly noticeable. But if you delay, it’s like putting a golf ball in your pocket. You will notice it at first, but you will soon get used to it. Wait too long, and now you are squeezing a baseball in that pocket. It can be done, but you will always notice it and your entire pocket will be full.
Don’t put off these conversations until your retirement needs to grow into a beachball. Give us a call now so we can help you get comfortable with your money.
* Converting an employer plan account or Traditional IRA to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences including but not limited to, a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA.