The Three Sexiest Retirement Savings Strategies

Great retirement planning is sexy!

Start planning now to have the retirement you choose, not the one that’s forced on you.

 

I just used the words “sexy” and “retirement” in the same sentence and I’m serious! Everybody needs to save for retirement, we all know that. That’s not sexy, that’s just a fact of life. But if you can get free money or tax free income while you’re saving – well, that makes it downright sexy!

 

So what are the three sexiest retirement savings strategies? The employer match, the Roth IRA, and the solo 401(k). Let me explain why.

 

First: The Employer Match. An employer match is where your boss matches a certain amount of your 401(k) contribution. For example: let’s say you make $50,000 a year and your employer has a 3% match. Three percent of $50,000 is $1,500. Your employer will “match” what you put in, so you’ll need to contribute at least $1,500 into your 401(k) to get the $1,500 from your employer. That’s free money to you! When you contribute to your 401(k) – it’s not counted on your tax return, but you still pay social security and medicare withholding on that money. The employer match has no withholding on it. It’s a straight contribution to your retirement savings. Free money. Free money is sexy! If you work for a company with an employer matching program, you need to get in on the action!

 

Second: the Roth IRA. A Roth IRA has no up front tax benefits to it. You put the money in after you’ve already paid tax on that money. What’s sexy about the Roth is that your investment grows tax-free. And more importantly, when you retire – you take that money out tax-free! I cannot stress just how valuable being able to access tax-free income during your retirement is! The Roth is probably the most accessible of the retirement options I’m talking about, but there are limits as to who can contribute to a Roth. Here’s a link to the IRS website showing the current limitations: Roth Limitations

 

Third: The Solo 401(k).  If you’re a solo business owner, or you and your spouse own a business together, then a solo 401(k) might be the plan for you.   For one thing – you can contribute up to 100% of your earned income (up to the maximum contribution allowed) to your 401(k).  This is great for folks who are actively trying to “catch up” on their retirement savings (and also happen to have another source of income!)

 

A solo 401(k) also allows you to make an “employer match” of up to 25% of your earned income.  You see, when you work for yourself, you’re both the employer and the employee!

 

So how do those numbers work?  Let’s say you own an S Corporation and you pay yourself a wage of $50,000. You can make an elective deferral – that’s what they call your 401(k) contribution – of up to $18,000 (or $24,000 if you’re 50 or older.)   That means your W2 is going to show that you have $32,000 of taxable income.  ($50,000 minus the $18,000 that you applied towards your 401(k).  You’ll have paid social security and medicare taxes on the full $50,000 – because you still pay the FICA on your retirement savings, just like if you worked for someone else.

 

But now, you’re still allowed to make an employer match of up to 25% of your earned income – in this case, I mean wages.  So, you could contribute another $12,500 towards your 401(k) as an employer match TAX FREE!  You don’t pay regular income tax on that money because it’s a business expense, right?  So it’s deducted from your business income as an employee benefit (where you’re the employee.)   And, since it’s an employer match – you don’t pay FICA either.  How cool is that?

 

Saving for retirement is necessary for everybody, but if can manage to swing tax free savings or tax free income it makes saving much more exciting.  You might even call it sexy!

 

 

Roth IRA Facts

Roth IRA distributions are tax free (as long as you've met the requirements.)  Earnings on your Roth are tax free.  If you die, your heirs inherit the money tax free.  I just love things that are tax free!

Roth IRA distributions are tax free (as long as you’ve met the requirements.) Earnings on your Roth are tax free. If you die, your heirs inherit the money tax free. I just love things that are tax free!

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I write about ROTH IRAs quite a bit, but someone recently asked me to explain ROTH IRAs so here we go:

 

A ROTH IRA is best defined by how it’s different from a regular (Traditional) IRA.  Here are the differences:

 

  1. You cannot deduct contributions to a ROTH IRA, so whatever money you invest into a Roth—you’re going to pay income tax on the year you invest it.
  2. If you satisfy the requirements, your ROTH distributions are tax-free.
  3. You can still make contributions to a Roth IRA even after you reach age 70 and ½.
  4. You can leave your money in your Roth IRA as long as you live.  (This is important for people who want to leave behind money for their heirs.  It also means you don’t have any required minimum distributions (RMDs) like you have with Traditional IRAs.  )
  5. You must designate the IRA as a Roth when you set it up (the default IRA setting is for a Traditional IRA.)

 

So why am I so gung ho about Roth IRAs?  I like things that are tax free.  The distributions are tax-free, the earnings are tax-free, and if you die, they go to your heirs tax-free.  That’s a lot of tax-free going on there.

 

Here’s another thing I really like about the Roth IRA—not only are the distributions tax-free, but the distributions don’t count towards your Adjusted Gross Income.  I realize I’m going into Tax Geek Speak here, but hear me out, because this is important.

 

Let’s say you’ve got a kid in college.  You haven’t saved enough money for tuition and you need $10,000 for the tuition payment.  Now you can take that money out of your Traditional IRA and not pay a penalty (because you won’t pay the penalty for early withdrawals when you use it for tuition), but you’ll still have to pay the regular income tax on it.  So if you’re in the 25% tax bracket, you’ll pay an additional $2500 in taxes to take that $10,000 out of your Traditional IRA.

 

Now, if you need the whole $10,000 then you’ll need to actually take $13,333 out and withhold $3,333 in order to have the $10,000 and still pay your taxes on it.  Plus, the IRA money that you take out goes on your tax return as income.  So if you’re applying for financial aid, your aid will be reduced because you’re showing $13,333 more in income than if you didn’t take any money out of your IRA.  (And you could use the financial aid—you couldn’t afford the tuition, right?)

 

Now, if you had a Roth IRA, you’d take out that $10,000 tax-free.  The $10,000 wouldn’t have an impact on your tax return and therefore, wouldn’t have the same negative impact on your FAFSA application.  See why I like the Roth IRA?

 

Here’s another example of where it’s useful.  Let’s say you’re retired and receiving Social Security income.  If your money is all in a traditional IRA or pension, your extra income can make your social security taxable—up to 85% of your Social Security income can be taxed.  But if you take money out of your Roth IRA, that will have no effect on whether your Social Security gets taxed or not.  The more you have in your Roth IRA, the more opportunity you’ve got to maneuver.

 

If you’re looking for a place to put some retirement money, my first choice is a Roth IRA.  Start saving today, you’ll be glad you did.

 

For more information about Roth IRAs, here’s a link to the IRS website:  http://www.irs.gov/Retirement-Plans/Traditional-and-Roth-IRAs

ROTH IRA Strategy for High Income Earners

High income earners are often excluded from the tax-free retirement benefits of a Roth IRA, but you may be able to work around it.

High income earners are often excluded from the tax-free retirement benefits of a Roth IRA, but you may be able to work around it.

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Perhaps you’ve heard about how great a ROTH IRA is: You put your money in an account and it grows tax free and when you take the money out at retirement time you get it all tax free. Awesome, right? Zero percent is a good tax rate. But if you’re in a high income bracket (see the chart below), you’re not eligible to contribute to a ROTH. But there may be a way around that for you. It’s called a ROTH IRA conversion. Here’s how it works:

 

Even though your income may prevent you from making a ROTH IRA contribution, there is no income limit for a Traditional IRA contribution. This is important—there is no income limit to making a Traditional IRA contribution. There are income limits as to whether it is deductible or not—but no limits as to your ability to make an IRA contribution.

 

For example: let’s say you earn $200,000 a year and you have a 401(k) plan at work. You can’t make a ROTH IRA contribution and you can’t have a deductible Traditional IRA contribution either. What you can do is make “non-deductible” contribution to a traditional IRA.

 

A non-deductible contribution to an IRA pretty much does the same thing as a ROTH—it grows tax free and at retirement it you can take it out tax free. The problem with the non-deductible IRA is that when you take it out, you take it out proportionately with your taxable IRA money.

 

For example: let’s say you have $20,000 on non-deductible IRA invested and another $80,000 in a traditional IRA that you rolled over from your 401(k) account for a total of $100,000 in IRA funds. You want to take the $20,000 of non-taxable money out. You can’t do it. If you take $20,000 out, the IRS is going to tax $16,000 of it because the non-taxable money comes out proportionately to the taxable money.

 

(Geek time: 20K + 80K = 100K

20K divided by 100K = .2 or 20 percent

$20,000 times 20% = $4,000 that is tax free

$20,000 – $4,000 = $16,000 taxable IRA)

 

So this is where the ROTH IRA conversion comes in. If you don’t have any money in a traditional IRA yet, then you can take that non-deductible IRA and convert it to a ROTH IRA with no tax consequences. There are currently no income limitations on doing a ROTH IRA conversion.

 

If you convert your money into a ROTH IRA, then when you want to take that money out—you’re taking it out of the ROTH. There is no equation determining how much is taxable or non-taxable—it’s all in the ROTH and it’s all non-taxable.

 

Now if you’ve already got money in a Traditional IRA, this strategy might not work for you because you’d be taxed on those funds during the conversion. If the total amount is fairly low, you might want to consider rolling it all over and taking the tax bite. You’d want to discuss that with your financial advisor and tax person before attempting that.

 

But if you don’t have any Traditional IRA funds, the non-deductible Traditional IRA contribution and ROTH IRA conversion might be a good strategy for setting aside some tax free retirement income for you.

 

Incomes where the ROTH IRA is completely phased out (2013):

 

Married filing jointly: $188,000
Single or head of household: $127,000
Married filing separately: $ 10,000

Time Value of Money and Taxes

Photo by Brian Mooney at Flickr.com

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

-Albert Einstein

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You probably have come across time value of money in one your finance classes or at least have a basic understanding of the idea.  Time value of money, as defined by Investopedia.com, is “the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.”  Basically, money is worth more now than it is later.  This idea would not exist however, if there was no concept of “interest”.

 

There are two types of interest – simple and compound.  Simple interest is interest paid on a beginning principal balance only.  If you are receiving monies, the interest earned in a given period is not added back to the principal and then applied the interest rate again and appears perfectly linear on a graph.  Compound interest is interest paid on a beginning balance and any interest that has accumulated in given a period of time.  On a graph compound interest appears with a geometric (or exponential) growth pattern.

 

The present value of a future sum is the core formula for the time value of money.  All time value of money equations are based off this formula so it is extremely important to review.  It is expressed as such:

 

PV = FV / (1 + i)^n

Where

PV = Present Value
FV = Future Value
i = interest rate
n = number of periods

 

The future value of a present sum is expressed as FV = PV * (1 + i) ^n.  We won’t discuss perpetuities or annuities in this post nor will we execute any actual calculations with the TMV formulas.

 

So how can we use this time value of money concept for tax optimization and more importantly, individual wealth?

 

Retirement Planning:  We have all seen the example where Johnny starts an IRA at age 35 while Susie starts one at 21 and the amazing difference of the account values when they both reach age 59 and a half.  This is because Susie’s IRA endured 14 more years of compounding.  The choice between a roth and a traditional IRA has important tax implications and time value of money has some influence in the decision.  With a Roth IRA for example, the taxpayer can receive tax free distributions of earnings at age 59 and a half while with a traditional IRA, the taxpayer receives an above the line deduction on IRA contributions – given that AGI thresholds are not crossed – and is taxed on the distributions.  If your income is expected to increase as you get older and your marginal tax rate is also expected to increase, then a Roth IRA makes more sense – naturally.  Do the immediate tax savings of traditional IRA contributions outweigh Roth IRA tax free distributions?

 

Tax Planning: Accelerate deductions, postponing income recognition.  This concept goes hand in hand with the time value of money concept – money today is worth more than money tomorrow.  By accelerating deductions you essentially reduce your taxable income and end up with a bigger refund or smaller balance due.   Some examples include prepaying your home mortgage interest in a given year, making an alimony payment in December as opposed to January, and writing off an asset using section 179 expensing or bonus depreciation as opposed to depreciating it over several years.  The amount of tax savings probably doesn’t have enough compounding power for individuals to make a huge substantial presence but for well established businesses it most definitely does.  Examples of postponing income are increasing your retirement plan contributions to a 401(k) plan, legally deferring compensation, and delaying the collection of any debts you are owed.

 

Investment Planning:  Younger people can be more aggressive because they have more time to make up for their losses.  A younger person’s portfolio can afford more risky securities such as stocks.  As one gets older, the switch to dividend producing stocks and bonds usually happens because the “interest rate” is more stable.

 

With time value of money, the uncertainty of the interest variable is the most difficult to tame.  Those who can predict its patterns the best, tend to make the most money.

Summer Job Super Gift

It's fun now

Photo by Eric Leslie on Flickr.com

Do you have a child or grandchild that has a summer job this year? If you want to give a “gift of a lifetime” I’ve got a suggestion for you. Make a contribution into a ROTH IRA account for the child to match the amount of income he or she earns this summer.

 

Saving for the future; sounds boring doesn’t it? I know, it’s not an I-Phone or a new car—but if you were to make a $5,000 contribution to a 16-year-old’s ROTH IRA—and he made no other contributions for the rest of his life—by the time he reached age 65 (assuming it earns an average of 7% interest per year) he’d retire with $138,000 (The Kiplinger Tax Letter, July 20, 2012). Now that’s a pretty sweet present!

 

Of course, there are rules that have to be met. For one thing, you can’t contribute more than the child actually makes for the year. Also, you can’t contribute more than $5,000 to a child’s ROTH IRA.

 

Obviously, this isn’t for everybody. You have to be at a certain stage of wealth to be gifting that kind of money to a kid’s IRA. And remember—that’s what it is; a gift. If you’re trying to avoid gift taxes—a contribution to a child’s IRA will count towards your $13,000 gift annual exclusion. You can’t give a child $13,000 and contribute to the ROTH IRA on top of that. You would have to reduce one or the other so that the total came to $13,000 or less or else a gift tax will be applied.

 

What about people who don’t have that kind of money to give away? You can make a smaller contribution. Maybe a thousand dollars instead; or maybe you make a deal with your child—you’ll match whatever they contribute to a ROTH IRA up to a certain dollar amount. (I recommend starting a ROTH IRA with at least $1000. Smaller sums are usually hit with more fees and wind up losing money instead of growing.)

 

Why put money into a kid’s ROTH IRA? So many reasons:
1. The money grows tax free
2. When it’s time to take the money out, it’s tax free
3. The money can be used for education, buying a home, or retirement
4. Giving your child a fighting chance for having a decent retirement nest egg

 

Why a ROTH and not a regular IRA? Regular IRAs are tax deductible when you make the contribution, but taxable when you take the money out. Most teenagers don’t need the tax deduction that comes with a regular IRA, so it really makes much more sense to invest in something that will be tax free at retirement. Note: the deductibility of the IRA goes to the owner of the IRA—so if you contribute to your child’s IRA—you don’t get the tax deduction, your child would.

 

I realize that this isn’t an option for everybody, but if you can afford putting money into a ROTH IRA for your child (or grandchild), it’s worth some serious consideration.

The Retirement Saver’s Credit – Cool Cash for Smart Young People

Wild Bill's bar in Cheney

Photo by Ben Lakeyon flickr.com

The Retirement Saver’s Credit sounds like an old person kind of tax credit, but, for the most part, it’s really more of a young person’s credit and it gets totally ignored. The coolest part about the Saver’s Credit is that it’s a credit, not a deduction. That means that it’s a dollar for dollar reduction of your tax liability. A $100 tax credit would reduce your taxes by $100. A $100 tax deduction would reduce your taxes by $10 to $35 depending on your tax bracket. See the difference? Tax credits are better than deductions. The Saver’s Credit is for people with lower incomes so we’re looking at 10 to 15% tax brackets.

The Saver’s Credit can be worth up to $1,000 ($2,000 if you’re married filing jointly), so it’s pretty valuable. Basically, it’s like the government is giving you money for saving for retirement – how cool is that?

Who’s eligible?

  1. You have to be 18 or over
  2. You can’t be a full time student
  3. You can’t be claimed as a dependent by someone else

So what are the income limitations?

  • Single, married filing separately, or qualifying widower – $28, 250
  • Head of Household – $42,375
  • Married filing jointly – $56,500

So what do I have to invest in to get this tax credit? That’s the easy part, you can invest in any of the following:

  1. A traditional or Roth IRA
  2. Most any employer sponsored retirement plan

The one thing that doesn’t qualify is rollover contributions. Also, if you’ve taken money out of a retirement plan, it could reduce your ability to qualify for the credit.

So if I put $1,000 into an IRA the government is going to give me a $1,000 tax credit? No. I said it’s easy, but it’s not that easy. It works on a sliding scale: the lower your income, the larger the percentage you get, somewhere between 10% and 50% of your contribution. The form you need is form 8880. Here’s a link: http://www.irs.gov/pub/irs-pdf/f8880.pdf

Let’s say you’re single, you made $18,000, and you put $2,000 into a Roth IRA. You’d qualify for a $400 tax credit. You can figure that out by looking at the chart and you’ll see you qualify for a 20% tax credit.

The coolest thing about the Retirement Saver’s Credit is that you can play with it. Let’s go back to the example above – you’re single and made $18,000. You have until April 15th to put money into an IRA, so you don’t have to have this all done before tax time. At $18,000 income, you qualify for a 20% tax credit, but at $16,999 you qualify for a 50% tax credit. So if you put $1,001 into a traditional IRA (instead of the $2,000 you were going to put into the ROTH), it will lower your overall income, making your “adjusted gross income” or AGI, $16,999. Now, instead of getting a $400 tax credit on $2000, you get a $500 tax credit on $1,001 – and you still have another $999 left over to save or spend.

So you might be thinking, “Cool, I’ll just put it all into an IRA!” And you can, but you reach a point where the credit doesn’t do you any more good. The Retirement Saver’s Credit is what’s called a “non-refundable” credit. That means that once you zero out your tax liability, you don’t get anything more.

Let’s go back to our example: you’re single, you make $18,000. This time you put the whole $2,000 into a traditional IRA. Now your AGI is $16,000, that means your taxable income is $6,500 and your tax liability is now $658. So you complete form 8880 and you see that you qualify for a 50% credit which is $1,000 but since your tax liability is only $658—that’s all the credit you get.

Now if you have $2,000 to put into savings, I am 100% behind you saving the full $2,000. But, you may be better off putting some of that money into a regular savings account instead. It’s something to play with. Never sneeze at a 50% return on your investment. Let’s be real, that’s what this is. Even the 10% and 20% return is a good deal. But once you’ve maxed out that return, then you need to look at what other options you’ve got. That’s why I like IRAs. You can figure out your tax return first before make the investment. The absolute best part – you can make the investment with your income tax refund! You can actually do your tax return, plan out your IRAs, and not fund them until after you’ve gotten your refund.

Not everyone will qualify for the Credit for Qualified Retirement Savings Contributions, but if your income is anywhere close, you’ll definitely want to at least look into it.

Cancelling Your Roth IRA Conversion

undo

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Whoa, that Roth IRA conversion you did last year seemed like such a great idea at the time didn’t it? I know I thought it was pretty wonderful. But things change and with the stock market tanking, your portfolio is probably not worth what it was back when you did the conversion. For some people, now might be a good time to – here’s the important IRS word: Recharacterize your IRA.

Basically, to recharacterize your IRA, you’re taking all the money that you “converted” and put it back into your Traditional IRA. You will need to talk with your financial adviser and fill out the proper forms to do this. You also have a deadline: you must complete the transaction by October 17th, so you don’t have a lot of time to work with here.

Once you recharacterize your Roth IRA, it will be like it never happened, so you’ll have to amend your tax return to eliminate the Roth conversion that you reported last April and claim a refund. But that might be the smartest tax move you ever made. Let’s take a look at an example:

Porky Pig is in the 25% tax bracket and he made a $10,000 Roth IRA conversion for tax year 2010. The cost of the conversion to Porky was $2500. But now, because of the stock market, Porky’s Roth IRA is only worth $8500. It’s like he paid $325 too much in tax. Is that enough for Porky to make a change? For me it is, but for some people it might not be.

Let’s take a look at Porky’s friend Bugs Bunny. Bugs did a larger conversion; he rolled over $50,000 into a ROTH IRA. Bugs has a tax rate of 33% so he paid $16,500 for his Roth IRA conversion. Bugs also had a bigger portfolio drop than Porky, his Roth IRA went down by 20% to $40,000. Bugs paid $3,300 too much in taxes for his Roth conversion. I would think that $3,300 has got to be too much tax by anyone’s standards.

So what should you do if you made a conversion and your portfolio tanked? First, you’ll want to make an analysis similar to Bugs and Porky’s. What’s the true cost to you in terms of taxes? Don’t forget how much it will cost to amend returns and pay your broker fees. If it makes sense to recharacterize, then by all means, do so.

Don’t get me wrong, I’m still a big fan of Roth IRAs and I still think that the Roth IRA conversion is a great tool, especially for people whose incomes are too high to make regular Roth contributions. It’s just that if recharacterizing your Roth can save you a large amount of tax money, you really should consider doing it.

Can you do a Roth conversion again later? Yes, but you’ll have to wait for at least 30 days before you do it. You’d be reporting the conversion on your 2011 return (unless you wait until 2012.) You would not get the advantage of being able to split the tax payment between two years.

I hope this sheds a little light on the situation. Remember, the deadline to recharacterize your Roth IRA to a Traditional IRA is October 17. Don’t wait until the last minute, remember that your financial adviser will need time to process the paperwork.

IRAs for Dummies

Writer

 

Okay first and foremost, you’re not a dummy!  But I wanted to make a simple post with simple explanations about IRAs.  This isn’t the be all end all of IRA stuff.  But hopefully it will give you a little clue about them.

A traditional IRA lets you put money away for retirement and you can get a tax deduction for the money that you put into the IRA.  For example:  if you’re in the 25% tax bracket and you put $1,000 into an IRA then you will save $250 in taxes for the year you put the money in.  (The tricky part is that there are limits as to how much is deductible if you or your spouse have a retirement plan at work.  There are also complications if you’re using the married filing separately status.  I’m not covering that here.  If this sounds like you, give me a call and I can help you figure it out.)
A Roth IRA lets you put money away for retirement but you don’t get a tax deduction for the money you put in.  $1,000 into a Roth IRA gives you no tax savings.  (There are income limits for contributing to a Roth, the phase out starts at $167,000.  If you’re under that income level, you’re fine.)
Generally, the most you can contribute to an IRA in a year is $5,500.  If you’re married, you can contribute $5,500 for you and $5,500 for your spouse, even if your spouse doesn’t work.  You can’t put more money into an IRA than you earned (so if you only made $3,000 that’s going to be your maximum contribution.)   If  you’re over 50 years old, you can contribute up to $6,500 to your IRA.
Remember, the $5,500 is a maximum.  It’s fine to contribute less.  Most accounts are going to want at least a $1,000 to open, but you don’t have to have $5,500 to put into an IRA. Its not an all or nothing kind of investment.
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When you take money out of your traditional IRA, the money you take out is taxable.  So, once again if you’re in the 25% tax bracket and you take $1,000 out of your IRA then you’ll pay $250 in taxes.  The concept is kind of like:  take a tax deduction now/pay taxes later.  Here’s where it’s tricky…if you take the $1,000 out before you are 59 1/2, not only will you pay the $250 in taxes, but you’ll also pay a 10% penalty making the total tax you pay $350.  There are exceptions to the penalty if you use the money to buy a house or pay tuition.  You will pay the tax no matter what, but sometimes you can escape the penalty.
With the traditional IRA you are playing a gambling game.  You’re betting that your taxes are higher now and will be lower when you retire.  That’s a good bet for many people.  So the traditional IRA is a good thing.
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When you take money out of your Roth IRA, the money you take out is not taxable.  So, if you take out $1,000 from your Roth and you’re in the 25% tax bracket, you will pay zero tax on that $1,000.  If you take the $1,000 out before you turn 59 1/2, you may pay a 10% penalty on the earnings but not on the whole $1000.  Roth IRA means tax-free income later.
I really like the Roth IRA for a couple of reasons:
  1. 1.  It’s especially good for young people.  The Roth is a great savings tool that can be used for buying a home and paying college tuition.  If you invest in a Roth when you’re in the 15% tax bracket but wind up taking the money out when you’re in the 25% tax bracket:  zowie!  You win!  It’s like a little tax bonus.
  2. 2.  Even if you’re more mature and already in the 25%  tax bracket or higher, I still like the Roth.  When you’re retired and receiving social security payments, your social security isn’t taxable until you cross a certain income threshhold.  Once you cross that line, your social security becomes taxable and it’s like you’re paying double taxes.  For example:  let’s say your pension and social security put you right at the line where if you make any more money your social security would be taxable.  Once you cross that line you’ll pay tax on your social security income.  If you take money out of your traditional IRA, let’s use the $1,000 example again, and you’re in the 15% tax bracket, you won’t pay 15%–you’ll pay even more because now your social security will be taxed too.  It’s not exactly double, it’s more like one and  a half times more.  (Kind of a funky equation.)  Bottom line:  once you start receiving social security payments, extra income is actually taxed at an even higher rate than your real tax rate because they start taxing your social security.    Ouch!  Ask any senior citizen who’s been hit with this.  It hurts.
  3. Now  if your retirement income is so far over the threshold that you don’t need to worry about additional tax (because you’ve maxed out your taxable social security), or if it’s nowhere near the threshhold, then it’s not really an issue for you.  But for many seniors, extra taxable income can be a big problem for them.  The Roth IRA can be a real lifesaver when you’re older.
If it’s not completely obvious yet, I’m a big Roth fan.  That said, if you need a tax deduction now, then traditional IRA is the way to go.  For example:  one  year, I needed to lower my personal income by $310 to claim a $2000 tax credit.  That’s a no brainer, of course I spent $310 on a traditional IRA to save $2,000.  I put the rest of my retirement money into a Roth.  You can do stuff like that when and if you need to.
There’s so much to know about IRAs and it can be really confusing.  This little post is just the tip of the iceberg.  For detailed information about IRAs, the IRS has a book called Publication 590.  Here’s a link to it:  Pub 590
Okay, I confess, that publication looks a little intimidating.  It’s 110 pages long.  But if you look at page one, the chapters and sections are set up based upon the questions people ask.  Look for your question and it will tell you the right page to find your answer.  It’s not so scary when you know that in advance.