Financial News & TipsAlan S. Moore / L’Observateur / March 10, 1999In these days of ever-increasing retirement savings opportunities, you may be finding it difficult to decide which IRA is the most advantageous for you. And this is not a one-time decision – each year you may want (orin fact need) to reevaluate your personal financial situation and qualifications. Assuming you are eligible to invest in all of theavailable IRA options* (Roth IRAs and deductible and non-deductible Traditional IRAs), it would be wise to consider the following facts before making your decision: In general, the more dollars you plan to accumulate in your IRA, the greater the potential tax benefits of the Roth IRA because qualified distributions are free of federal income taxes and penalties. If youanticipate waiting many years before taking distributions, plan to invest aggressively, or expect to be in a higher tax bracket when you tak distributions, the overall tax benefits of the Roth may be more advantageous than the Traditional IRA which is always subject to ordinary income taxes on distributed amounts not attributable to non-deductible contributions.
Published 12:00 am Wednesday, March 10, 1999
If you expect your tax bracket to be lower in retirement than it is today, you may find that the Roth IRA’s tax advantage is significantly diminished.
Eligible investors might prefer to make deductible contributions to their Traditional IRA today, deferring taxation until the point of distribution in retirement at the lower rate. Remember, non-deductible contributions tothe Roth or Traditional IRA provide no tax benefit for the year of contribution.
The longer it takes you to withdraw the dollars in your account, the more beneficial the Roth will generally be. This is simply because yourmoney can enjoy its tax-deferred status longer, as there are no mandatory required distributions (MRDs) from a Roth IRA before death. As a resultyou can potentially earn more that can qualify to be withdrawn free of federal income taxes and penalties.
If you anticipate tapping your IRA within five years, it’s a toss-up as to which IRA is more beneficial. A deductible Traditional IRA will bring amore immediate tax benefit at the point of contribution than the always nondeductible Roth. However, Roth contributions are always distributedfederal income tax and penalty free, because you’ve already paid taxes on those contributed amounts. The choice here is whether to take a currenttax deduction for contributions to a deductible Traditional IRA and pay taxes at the point of distribution OR to forego the current deduction on the contributions to the Roth and withdraw contributed amounts free of federal income taxes and penalties. In either case any distributedinvestment earnings will be subject to ordinary income taxes and may be subject to a 10% early withdrawal penalty.
State taxes are still a relative unknown with respect to Roth IRA distributions and could potentially reduce any tax advantages of the Roth IRA.
For those individuals over age 70 1/2, a Roth IRA is the only IRA option provided you have sufficient earned income.
Your financial advisor should be able to provide you with an illustration of how the Roth IRA and deductible and non-deductible Traditional IRAs compare for you. Of course, I urge you to seek the advice of a qualified taxprofessional as to your specific situation.
Not all investors will be eligible for the Roth IRA or a deductible or non- deductible Traditional IRA.
(Alan S. Moore is a financial advisor in the New Orleans office of LeggMason Wood Walker, Inc., a diversified securities brokerage and financialservices firm that is a member of the New York Stock Exchange, Inc. andSIPC.)
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