That’s right, folks. Albert Einstein thought the tax code was too complex to understand. Where does that leave us mere mortal non-physicists? Hopefully, reading the Sullivan Financial Planning blog!
When anyone is talking to you about investment ideas, the question you need to be asking is simple: What’s in it for me?
In the case of deciding what kind of IRA to use, you want to know what benefits are there for using a Roth vs. the old Traditional. This week, we discuss the first of the top 2 reasons people choose a Roth IRA: Tax-free withdrawals in retirement.
Brainy advisers will try to tell you to figure how much your tax rate is now vs. how much you think your tax rate will be in retirement. If you think the now tax rate is higher than the retirement tax rate, you should NOT use a Roth IRA – so goes the conventional wisdom.
I say differently. In retirement, taxes become a bill that you have to pay along with food, utilities and medicine. Every time a you take money from a Traditional IRA, 401(k), 403(b), SEP IRA, or other tax-deferred account, you generate a tax bill. Ugh!
Having a Roth IRA means there is one glorious account from which a retiree can take money and not have a tax bill on the withdrawal. As that retiree, you are not going to be doing the math of whether or not you paid more taxes in your working years to get that pool of money. You’ll just be glad to have it.
I tell people that having a Roth IRA in retirement is like having life insurance at your spouse’s death. No one ever said there was too much life insurance money and regretted the premiums when it came time to collect. And I’ve never seen a retiree regret his Roth IRA pool of money.
Next week, we talk about reason #2 to use Roth IRAs – passing along income tax-free assets to your heirs.
