Early Withdrawal

Question: IRA – Roth or Traditional? Long Range Tax Planning?

O.K. I know that a Roth IRA uses after-tax dollars and grows tax free and that certain contributions to a traditional IRA are deductible. Has anyone considered the very long range (30+) impact of federal income tax rates on their decision of which form of IRA to select. Given the level of the deficit and the national debt, I sense that we may be in a period of historically low federal income tax rates and that in, say 30 years from now, rates may be so high that I end up paying more taxes on withdrawals from a Traditional IRA than that taxes I would pay on my contributions to a Roth IRA today. Your thoughts?

Answer: I’m a CPA and the Roth beats the traditional in almost every situation. Think of it this way…….which is better? Tax Deferred or Tax-Free? With the traditional IRA you eventually pay the piper.

Two possible exceptions: In the 401(k) scenario with an employer match, always take the free money. Secondly, if you are nearing retirement and we are expecting a down market over the next five years, that might be a scenario where the deduction rather than the tax-free growth might make sense. Run the numbers if this latter situation applies to you.

IRA Distribution Mistakes