Is a Roth IRA more profitable than a traditional IRA?
This question is extremely difficult, if not impossible, to answer!
The Roth IRA was established by the Taxpayer Relief Act of 1997. Taxpayer Relief??
More like Government Relief. With a traditional IRA you make your contributions
before paying taxes, the money grows tax free, then you pay your taxes later as you
take the money out. Inflation makes the taxes higher, but the government has to
wait for their tax revenue.
Your contributions to a Roth IRA are made after you pay your taxes, the money
grows tax free, and you pay no additional tax when you take the money out.
Most of us look at this as the government wants its taxes now instead of later
which is why Roth IRAs are not that popular. The financial advantage for us
depends on our marginal tax rates when we
contribute to a Roth vs our marginal tax rates when we withdraw the money. The
marginal rate has to include federal, state, and local tax rates enhanced by the
taxability of deferred taxable income like your Social Security benefits and / or
Roth contributions are limited to $5,500 before the age of 50 and $6,500 at 50 or
One of the primary advantage for a Roth is the avoidance of the 46.25% and 55.5%
marginal rates, but there are other useful reasons for making contributions or
doing Roth Conversions.
What if you suddenly find yourself in a situation where your taxable income leaves
you in a low tax bracket? You are on long term disability where your income is
considered as tax free! Your tax bracket could be down to 15% or less, one way to
take advantage of this situation is a Roth Conversion.
A simple Roth Conversion is relatively easy to understand. You instruct your broker
to move a portion of your holdings from your traditional IRA account to your Roth IRA
account. Your only responsibility is to treat the transferred amount as ordinary
income and pay the taxes at your current tax rate.
Option 1 is to tell your broker to withhold the necessary taxes as the transfer is
done and deposit only the after tax amount into your Roth. Option 2 is to pay the
taxes from an alternate source. Option 2 is sort of like making an additional Roth
contribution, but it does not count as a contribution.
What Symbols Should You Convert?
Is it better to convert ABC or XYZ?
Convert the one that will grow the most!