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  • Barry Boscoe

The Roth IRA, is it right or wrong for you?

There has been a lot of talk and press about the benefits of saving in a Roth IRA. Those who make a good living and are in a higher tax bracket will likely change as you enter retirement. Are you better taking the tax deduction now and paying taxes later when your taxes may be lower in retirement? What is the right or wrong thing to do?

This question troubles many people and is a topic to maximize their retirement plan. As you probably know, saving for retirement is very important, but how you save is more important. For your retirement savings to be worth as much as possible, you have to save in suitable accounts for your specific situation.

If you are in a higher tax bracket today than you will be in retirement, you should take the tax deduction now and pay taxes later. Remember, the ultimate retirement goal is to pay the least amount of taxes on your retirement money that is possible. Thus, again, if you can save more taxes now than you will pay later, then saving in a traditional IRA or 401(k) is the proper way for you to go.

However, many people will not be in a lower tax bracket in retirement, and they are saving incorrectly, which will cost them a lot more in taxes. Why is that the case? Well, there are several reasons.

The main reason is how the tax system works in retirement. When you take money out of a traditional retirement savings plan, that money, of course, is taxable at that time. However, that money also counts in the provisional income formula, determining how much your Social Security is taxed. Thus, traditional retirement savings withdrawals cause Social Security to be taxed in most cases. In addition to this, that income also gets calculated into the formula, which determines how much your Medicare part B premium costs. So, not only is that money taxable, but it can cause other taxes as well, and most people are not aware of this or do not consider these things when saving for retirement. In retirement, Roth income is not taxable and is not counted in these formulas.

Next, you have to consider inheritance and estate taxes. Again, traditional retirement savings income is taxable to the people who inherit your money. Typically, for married couples, one person passes away before the other, which causes the surviving spouse to have to file as a single person, which is an immediate tax increase in most cases. And since you lose one of the Social Security checks when a spouse passes away, the surviving spouse may very well need more income from the retirement savings, which, again, is taxable now at higher single rates.

Next, you have to consider the many deductions you may lose in retirement. Many people can deduct mortgage interest and charitable contributions during their working years, saving tax dollars. In addition, you get tax credits for children. In retirement, these deductions usually go away.

And finally, you also have to give some serious consideration to where tax rates will be in the future. Today’s tax rates are near historic lows, but that will probably be changing very soon based on overspending and national debt issues. So, you may very well be in a higher tax bracket now than you will be in retirement at today’s tax rates, but that may very well not be the case in the future.

You have to consider many factors when determining how to adequately save for retirement to minimize your overall taxes in retirement. Many people are shocked and surprised that they have to pay more in taxes in retirement based on the dynamics above. Again, if you are sure you are in a higher bracket now than in retirement, you are saving correctly. But do yourself a favor and factor in all of the above information to make sure you still feel that will be the case.

Given the complexity of this topic, feel free to reach out to me for a phone call to discuss

whether a Roth IRA is right or wrong for you?


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