To Roth, or Not to Roth
To Roth, or not to Roth? That’s a question that confronts both financial advisors and their clients alike. And this is true whether you’re considering making an annual contribution or thinking about converting an existing retirement account. The idea of tax-free growth in a Roth has a lot of appeal, but simply saying that Roth IRAs are always the better choice would be foolish, in my opinion. Here are three factors that may determine if a Roth IRA might be better for you than a Traditional IRA.
1. The current versus future marginal tax rates.
This is by far the biggest determining factor in the Roth-or-Traditional debate. And it makes sense. You could create greater wealth by paying taxes when the tax rates are lowest. If you know your rates are low today and higher in the future, consider paying the lower taxes today and go with the Roth. But if rates for you will be lower in the future, then the Traditional IRA may be the better choice for you.
2. The Impact of RMDs
One important distinction of the Roth IRA is that the owner is not required to take Required Minimum Distributions from that account. Traditional IRAs do not have that luxury. Being able to leave more money under a tax-preferenced umbrella is the upside for the Roth, because RMDs force dollars into taxable accounts where their future earnings could be slowed down by taxes. But keep in mind that this only applies only as long as the Roth owner is alive – after that, the non-spouse beneficiaries of a Roth have the same RMD rules as those for a Traditional IRA.
3. The flexibility and the accessibility of the accounts
When you put money into a deductible traditional IRA, that money has to remain there until you’re at least 59 ½ years old to avoid a 10 percent penalty. But with a Roth IRA, you can withdraw your contributions at any time, for any reason. No taxes, no penalties. And if you’re over 59 ½ and have had a Roth IRA for at least five tax years, your earnings also come out tax free. So if you like your money to be accessible on demand, the Roth may be better for you.
But remember that current versus future tax rates are the driving force here. So while the Roth is better in many situations, it’s not automatic for everyone. With all else being equal, if your taxes will be lower when you withdraw the money, the Roth can be the wrong decision. To find out if the Roth or the Traditional IRA could be better for you, just contact us for your free Roth IRA analysis. We can give you guidance on this and any other financial planning issues you have.Get Your Roth IRA Analysis
Information presented should not be considered specific tax, legal, or investment advice. You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal.
No client or prospective client should assume that the information contained herein (or any component thereof) serves as the receipt of, or a substitute for, personalized advice from Lucia Capital Group, its investment adviser representatives, affiliates or any other investment professional.
IRA withdrawals will be taxed at ordinary income rates. Withdrawals prior to age 59½ may also be subject to a 10% penalty tax.
Roth IRA distributions of principal from a Roth IRA are tax-free; however, any earnings will be taxed at ordinary income rates and a 10% penalty tax will apply if withdrawn prior to age 59½ or within five years of the date the Roth IRA was established, whichever is longer.
Raymond J. Lucia Jr. is chairman of Lucia Capital Group, and CEO of its affiliated broker/dealer, Lucia Securities, LLC, member FINRA/SIPC, which is a subsidiary of Lucia Capital Group, a registered investment advisor. Registration with the SEC does not imply a certain level of skill or training. Advisory services offered through Lucia Capital Group. Securities offered through Lucia Securities, LLC. CAA-10826