June 4, 2018
The Traditional IRA (aka Individual Retirement Account) was introduced in 1974 as a retirement scheme for the masses that would allow a tax deduction for a maximum $2,000 contribution. Accounts were set up with personal discretion at a bank or mutual fund company. Gains were tax deferred.
In 1997 the Roth IRA was created that offered a new twist. Instead of ‘writing off’ contributions, funding was made with ‘after tax’ dollars while withdrawals would be tax free. Roth 401k’s completed the trifecta in 2006 allowing for employee payroll contributions as well.
So, tax me now (Roth) or tax me later (Traditional.) Which is better? Answer: Compare your tax rate while earning vs the total tax take in retirement.
Say, you and your spouse earn $120K with a deductible 401k and standard deduction offsets would have taxable income of $84K, yielding a tax haul of ~$13,500 (11%) with a top combine rate of 31%.
In retirement, this couple tells their advisor they need $5,000 per month ($60K / year) to cover the basics. He estimates a $65K withdrawal would net $5,000 per month after taxes, or tax take of (only) 8%.
In this fairly common scenario, the 31% saved, 8% paid suggests the traditional tax deductible IRA would be by far the wise choice.
Both types of accounts serve unique retirement income needs. Anticipating the benefits of each is the challenge for which we help clients, and can help you as well. Our fee based practice allows us to focus on these specific issues with minimal time spent but with great reward.
31% saved, 8% paid! Not a bad deal all told.
One last thing.
If interested in following up, we offer a 30-minute free
no obligation session tailored to you.
Let us assist you in becoming financially independent.
Eric Dahl – 415.640.6770