Frederick Fisher: Roth IRA or traditional — which is better?
Over the years, we have had many clients ask, “Which should I invest in, a Roth or Regular IRA?” They both are excellent retirement vehicles and generally can be invested in almost any asset. To illustrate the differences and determine which one is more appropriate, we will take the case of hypothetical clients, Jim and Sally Jones and Roger Stevens.
Jim and Sally are a young couple starting out. They want to get an early start on retirement savings. Currently neither of their employers offer a retirement plan, so both are eligible for the tax deduction from a traditional IRA. In order to determine which IRA is better for them, we needed to know their income and tax bracket. Since they are just starting out, their salaries are relatively low, and taxes are of secondary concern. In their case a Roth IRA may be the better way to go. While a Roth IRA contribution is not tax deductible, like a traditional IRA. Its major benefit is that under current law you are not taxed on distributions in retirement. Therefore when they retire in 30 years they will be able to start drawing on this account without income tax. Assuming that income taxes will increase over time and that their income will be higher at retirement, this may be a significant benefit.
While the Traditional IRA and Roth IRA grow tax deferred, the main difference is when you get the tax benefit, upon contribution for the Traditional, upon distribution for the Roth IRA. The contribution limits are the same. For 2017, the max you can contribute is $5,500 for those under 50 years old and $6,500 if you are 50 or over. However there are income limits on Roth IRA contributions. For single filers the income limit is $133k Modified Adjusted Gross Income (MAGI), and for joint filers that increases to $196K.
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For the Joneses, this was not a concern. For Roger, it was. Roger is 42 and investing in a new business that expects to make him between $120k and $150k this year. He likes the idea of tax free income, because he has significant money in a 401k which, like traditional IRA’s, will be taxed on distribution. He would like to have some flexibility regarding the tax treatment of retirement income. We advised him to wait to determine his taxable income for this year, and see if he qualifies for the Roth. If not he could always add to his Traditional IRA, along with other plan options that are available. Since both plans allow prior year contributions up to April 15 of the following year, that buys Roger some time to make a decision. Another advantage of the Roth IRA that both the Jones and Roger liked was that they are not forced to take money from the Roth IRA at 70 ½. They are forced to take from a traditional IRA and most other retirement plans.
With this information, the Jones started Roth IRA’s for themselves. Roger decided to wait to see where his MAGI for 2017 will be. Then if possible, he would open a Roth IRA, if not he would add to his existing traditional IRA. Should you want advice on how to best allocate your tax advantaged retirement dollars, call our office for a complementary review.
Frederick Fisher is a Certified Financial Planning Practitioner, and Insurance Agent with Ostrofe Financial Consultants, Inc. managing over $208 million in assets, with clients in 29 states. Securities and Advisory Services offered through National Planning Corporation (NPC), member FINRA/SIPC, a Registered Investment Advisor. Ostrofe Financial and NPC are separate and unrelated companies. NPC does not offer tax advice. For questions or suggestions, contact Rick Fisher at (530) 273-4425, or firstname.lastname@example.org, or visit ostrofefinancial.com. Branch address: 565 Brunswick Road, Ste. 15, Grass Valley.
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