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  • Writer's picture Treavor Dodsworth CFP®, CPA, CKA®

#131 - Traditional IRA vs. Roth IRA

Traditional IRA vs. Roth IRA

Over the rest of my wife and I’s lifetime, we are expected to pay $2,508,660 in taxes between federal/state/local income taxes and Social Security/Medicare taxes. Now, that is based on an insane number of assumptions and I don’t have everything inputted (like the Indiana tax credit for 529 contributions or the Indiana tax credit for Scholarship Granting Organizations) but regardless it’s safe to assume our lifetime tax bill won’t be a small number. One way to manage this number is choosing where to prioritize your savings for the future.

The difference between a Traditional IRA and Roth IRA has nothing to do with the actual performance of the account. You could put the same amount of money into both accounts and after ten years the account balances could be exactly the same. The primary difference is how it impacts your taxes - particularly taxes paid over your lifetime.

Traditional IRA - Generally take a tax deduction today (if you are eligible) and include the entire account (contribution and earnings) in income for income tax in the future.

Roth IRA - Generally no tax deduction today and exclude the entire account (contribution and earnings) from tax in the future.

There are exceptions obviously to these general rules - Qualifying Charitable Distributions, not waiting to the right age, non-deductible IRA contributions, etc.

When choosing pre-tax contributions or Roth contributions, don't only look at the impact today but also the lifetime impact on taxes and after-tax net assets. While sometimes it does make sense to take the tax deduction today, that is far from a guarantee. Sometimes it is better to pay the tax today to avoid tax later.

Another consideration that should not be overlooked is what you actually do with the tax savings if you make a tax-deductible contribution. If you use it to increase your standard of living as opposed to investing it, that would change the overall impact on after-tax net assets between Traditional IRA vs. Roth IRA.

Note - If you are a client and are just curious what that remaining lifetime total tax number is for you, let me know.


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A Wealth of Common Sense - How to Prepare for a Recession

  • Great perspective from Ben Carlson about not preparing for “The” recession but instead making choices that keep you prepared for a recession (macro or micro).


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