Being Smart with $$ -- Roth or Traditonal IRA?

It’s tax day for most of the country. It’s the last chance to contribute to your IRA for 2018.  But should you choose a Roth IRA, where you don’t get a tax deduction for last year but all money grows tax free, or should you choose a Traditional IRA where you get a tax deduction now but all the money in the account will be taxable later when you withdraw it for retirement?  There are some different considerations but in simple math terms, it all depends on whether your tax rate will be higher or lower in retirement.  If your tax rate will decline, you may want to choose the Traditional IRA and get the deduction now.  If your tax rate might be higher in retirement, then you may choose to pay the taxes today and contribute to the Roth IRA.  But contrary to what people often tell me they believe, if your tax rate will be the same, then you come out equal.  It does not matter how long you own the assets.  If you assume the same investment in each account with the same returns, and assume that you can put the full pre-tax amount into the Traditional IRA but only the after-tax amount into the Roth IRA (because that’s all the cash you have left after paying taxes), then only the tax rate can cause a different result.  But hurry.  You’re almost out of time.

Larry Pike, CFA

Client Priority Financial Advisors LLC
www.clientpriority.com