Daniel Kresh FPQP™
Would you rather have a small tax deduction this year or tax-free retirement money in the future?
The unique advantages of a Roth IRA make it one of the most powerful ways to save for retirement and beyond, especially for people early in their careers. Time is one of the biggest factors impacting how you should invest. The more time you have, the more advantageous the Roth IRA can be.
For Millennials, there are numerous advantages to opening a Roth IRA. Assuming your income does not exceed the limit[i], for many, the Roth IRA is the best place to start retirement planning in my opinion. Though you can’t take deductions when contributing to a Roth IRA, future distributions are tax free if they meet certain requirements[ii]. This gives you a unique opportunity to pay a potentially lower tax rate now, without the gains being taxed in the future!
The Roth IRA is best for those who are in lower tax brackets, and whose income is expected to grow. The lower your taxes are now, the smaller the impact on your tax bill if your contributions are not deductible. You may never be in a tax bracket this low again!
With a Traditional IRA, though contributions are deductible now, all the distributions count as income for tax purposes. This means that 100% of distributions from a Traditional IRA will be taxed at your highest marginal tax bracket each year! With current tax laws, your ordinary income is taxed at a higher rate than long term capital gains[iii]. Since all distributions from a Traditional IRA count as ordinary income, they would have a larger tax burden than selling investments outside of retirements accounts. Distributions from a Roth IRA are tax free[iv]!
You are never required to take distributions from a Roth IRA! You can also keep contributing to a Roth IRA as long as you have earned income. With a Traditional IRA, when you turn 701/2[v] you will need to start taking distributions, and can no longer make contributions. You can’t avoid paying those taxes forever.
There are many other unique and advantageous properties that Roth IRA’s offer. This is part 1 in a series of articles I will be writing over the next few months outlining some of the other differences and potential benefits of Roth IRAs. Keep your eyes open for Part 2 with important information for first time homebuyers.
Remember, it’s never too early to start thinking about retirement. The earlier you start the more time you have for growth. You work hard for your money, we work hard so your money can work for you.
[iv]A Roth IRA distribution is qualified if you’ve had the account for at least five years and/or the distribution is made after you’ve reached age 59½, because of your total and permanent disability, in the event of your death or for first-time homebuyer expenses. Distributions made prior to age 59 1/2 may be subject to a federal income tax penalty. If converting a traditional IRA to a Roth IRA, you will owe ordinary income taxes on any previously deducted traditional IRA contributions and on all earnings
You should always consult a tax professional and though this piece contains some tax information it should not be considered tax advice.