Taxes and death are life's tw certainties, or so goes the classic saying. Fortunately when it comes to IRAs we have some options at least about when we pay those taxes.
Most people seem to immediately migrate towards the traditional IRA because it offers a tax haven until retirement. Any money invested in this type of IRA is not subject to taxes until it is withdrawn. For many people this is the best situation, but not for everyone.
A Roth IRA on the other hand is not tax free. Currently, all taxes must be paid within two years of buying into the investment. The advantage is that you will owe no tax when the money is withdrawn. This can be a great benefit when one is on a fixed income and also many people will actually be in a higher tax bracket when they retire than they were when they were young and just beginning their retirement investments.
The new two year Roth plan was introduced as a result of the lifted restrictions on who can invest in a Roth IRA. The IRS is greedy and want their money as quickly as possible. Therefore they want to entice as many people as possible into investing in Roth IRAs. The government is not doing you any favors by letting you pay the taxes over a two year period any more than a loan shark would be doing you a favor in extending your gambling debt payments. Payments stretched out over a mere 2 years can be up to 10% higher than if the taxes were paid up front.
There are still times when converting a traditional IRA to a Roth makes sense, even if you must stretch out the payments. Depending on your investment, even a 10% penalty paid today can save you money years down the line when taxes will likely be even higher than they are today, if you can believe that.
The ultimate decision must be based off one's personal situation. For many people, traditional IRAs are fine and should be left alone. For others, their financial situation has changed enough that they will be better off converting to a Roth and avoiding higher future taxes. To decide which category you fall into, you must predict your retirement age and income level. Also, other investments that will be paying an annuity can also bump you into a higher bracket. Carefully consider your situation before making a decision one way or the other.
Most people seem to immediately migrate towards the traditional IRA because it offers a tax haven until retirement. Any money invested in this type of IRA is not subject to taxes until it is withdrawn. For many people this is the best situation, but not for everyone.
A Roth IRA on the other hand is not tax free. Currently, all taxes must be paid within two years of buying into the investment. The advantage is that you will owe no tax when the money is withdrawn. This can be a great benefit when one is on a fixed income and also many people will actually be in a higher tax bracket when they retire than they were when they were young and just beginning their retirement investments.
The new two year Roth plan was introduced as a result of the lifted restrictions on who can invest in a Roth IRA. The IRS is greedy and want their money as quickly as possible. Therefore they want to entice as many people as possible into investing in Roth IRAs. The government is not doing you any favors by letting you pay the taxes over a two year period any more than a loan shark would be doing you a favor in extending your gambling debt payments. Payments stretched out over a mere 2 years can be up to 10% higher than if the taxes were paid up front.
There are still times when converting a traditional IRA to a Roth makes sense, even if you must stretch out the payments. Depending on your investment, even a 10% penalty paid today can save you money years down the line when taxes will likely be even higher than they are today, if you can believe that.
The ultimate decision must be based off one's personal situation. For many people, traditional IRAs are fine and should be left alone. For others, their financial situation has changed enough that they will be better off converting to a Roth and avoiding higher future taxes. To decide which category you fall into, you must predict your retirement age and income level. Also, other investments that will be paying an annuity can also bump you into a higher bracket. Carefully consider your situation before making a decision one way or the other.