• Treavor Dodsworth

#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.

 

Interesting Article(s) or Video(s)

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).

 

Thank you for reading!

Thanks! Message sent.

All written content on this website is for information purposes only. Opinions expressed herein are solely those of Sycomore Financial, unless otherwise specifically cited.  Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. The owner of this website takes great care to thoroughly research the information provided to ensure that it is accurate and current. Nonetheless, the content on this website is not intended to provide tax, legal, accounting, financial, or professional advice, and readers are advised to seek out qualified professionals that provide advice on these issues. All information or ideas provided should be discussed in detail with an advisor, accountant, legal counsel, and/or other pertinent professionals prior to implementation. In addition, the owner cannot guarantee that the information on this website has not been outdated or otherwise rendered incorrect by subsequent new research, legislation, or other changes in law or binding guidance. Neither Sycomore Financial or it's owner shall have any liability or responsibility to any individual or entity with respect to losses or damages caused or alleged to be caused, directly or indirectly, by the information contained on this website. In addition, any advice, articles, or commentary included on this website do not constitute a tax opinion and are not intended or written to be used, nor can they be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. Any mention of an investment product or solution is not a recommendation to buy or sell. ETFs that are mentioned may not accurately reflect the market segment mentioned. Past performance is not a guarantee of future results. Any mention of rates or return should not be seen as a guarantee those rates or return will be received.