To Roth IRA or Not to Roth IRA

Traditional IRAs and Roth IRAs are financial vehicles designed for retirement. If you’re not participating in a 401(k) plan at work, you may be enticed to contribute money towards an IRA because it comes with tax deductibility and tax credits based on how you file income taxes.

Although the upfront benefits of an IRA are attractive, every dollar withdrawn for retirement income after 59 1/2 years old becomes completely exposed and subject to federal and state income taxation.

You need $100,000 each year to continue living the lifestyle you’ve become accustomed to?  Well, as an example, you’ll need to be prepared to withdraw $116,000 from your IRA, deal with the tax consequence of writing a check to the IRS and state government for over $16,000 so you can net $100,000.

Are you prepared for that?  This is assuming after trillions spent on stimulus packages, healthcare and Wall Street reform with Bush-era income tax cuts expiring, that taxes and what you are required to pay the IRS for income taxes, are not going to go up over the years!

Roth IRAs, however, have no upfront tax deductions or tax credits.  The flipside (no pun intended because I’m Filipino) is after it is established for at least five years and you’re over 59 1/2 years old, this creates ZERO federal and state income taxes on withdrawals.  You want $100,000?  You withdraw $100,000 and keep it all…no check to the IRS or state government.

Unfortunately, if you’re single (or divorced) and make over $122,000 a year, you cannot contribute into a Roth IRA.   However, if you have an existing IRA or a former employer’s 401(k) plan than you have not rolled over into an IRA, you have an opportunity to covert this to a Roth IRA.  Sure, you’ll have to pay income taxes on this conversion but it is definitely worth a deep discussion with your financial and tax advisors.

The opportunity to have a bucket of cash that can grow, compound and later accessed tax-free is a gamechanger, especially if you expect to make more money in the future.

Question: If you were a farmer and had a choice when to pay taxes – would you rather be taxed on your penny seeds in the spring or taxed on your million dollar harvest in the fall?

If you know a good farmer that has fought through good and bad times…they’ll tell you, “THE SEEDS!”

Roth IRAs allow you to do this.  The video I’ve included in this blog was an interview with Certified Financial Planner, Jeff Rose of

Although the conversion opportunity shared in this interview done in 2010 to parlay taxes over a two year period is no longer available, the principles of the Roth IRA in this video are still valid.  I’m really excited for the young adults who establish a Roth IRA and contribute religiously over the next 30-40 years in a tax-free environment, like Tom Forde, whom I coached in season one of MSN Money’s “The Invested Life”.

Like Tom, you’ll find out the rules in winning the money game if you expect more of yourself and become used to asking greater quality questions.

After all, SMART is the new RICH.

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