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 dividends.

Roth contributions are limited to $5,500 before the age of 50 and $6,500 at 50 or higher.

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.

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!

A-         A+

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