Do you have an IRA or a 401(k)? If you do, a ROTH may be in order, but you need to consider a few things prior to opening a ROTH IRA or 401(k). With the uncertainty of Congress and what all the politicians will do going forward who knows what tax changes or changes to ROTH accounts could happen in the future. Also, I do not see taxes going down that much going forward and unless you are near the bottom of a tax bracket when you retire I doubt your taxes will go down much in retirement. In the past, there were many more tax brackets, and now there are significantly fewer, so the likelihood of a major decrease is smaller.
The wisdom of many planners over the years has been split on ROTH versus Traditional retirement accounts. I am a believer that the ROTH is the way to go if time is one your side and you can make considerable contributions to the accounts, both IRA and 401(k). This is especially true for those who are younger and in a lower tax bracket when they make their initial ROTH contributions. The reason is that while you receive no tax deduction in the year the contribution was made it stands to reason as you are early in your career you are paying less in taxes. Therefore the tax deduction compared to the tax-free income is of greater value at this point in your life, go with the ROTH.
If you are in a higher tax bracket, the advantages may not be as apparent without looking much deeper. While it is true you are limited by your income on ROTH IRA’s there is no income limitation on ROTH 401(k) accounts. If you are in a higher tax bracket the point in which the deduction and tax-free nature of the account in the future are not as pronounced. In several instances, I have read where someone invests in a ROTH account or accounts they seem to come out far ahead of a Traditional account holder. But when you factor in the larger current tax deduction and invest the difference in a taxable account. When compared to a ROTH the two accounts combined are about equal when it is all said and done.
The other major consideration when considering a ROTH account is your time frame. ROTH accounts by nature are designed to work best when the contributions are closer to the maximums, and you have 30 plus years for the account to grow into a sizeable tax-free total. Younger investors benefit here much more than older investors who are closer to retirement. That is not to say someone with ten years until retirement who contributes the maximums will not come out ahead. In order to determine that you will have to run your numbers, and it may be advisable to seek out the help of a professional financial planner.
A final consideration is to be diversified tax wise. Just as it is important to be diversified in your portfolio, it is also wise to diversify your holdings into taxable and non-taxable accounts. In retirement, it may be advantageous to have funds one year come from a taxable account and a tax-free account in another year. Also, consider the fact ROTH distributions have no minimum age withdrawal requirements and do not affect your income taxes and your Social Security benefits.
For more information or questions concerning ROTH accounts, feel free to contact me.
