Roth or Traditional Retirement Account?
There are many ways to fund retirement from using rental properties to various types of tax deferred retirement accounts.
Retirement Accounts can be classified as either Roth or Traditional
In the United States retirement accounts can be IRA, 401k, 403b, etc. Each account has a similar theme of various tax benefits with the main difference being the amount of yearly contributions. Another article can go through the various differences or deep dive into each account structures rules. Today I just want to focus on the difference between Roth and Traditional.
Traditional retirement plan contributions receive an upfront tax deduction (each contribution reduces the amount of taxable income for the year) and the contributions grow tax deferred for as long as the money stays inside the traditional retirement account. I suggest you play around with financial calculators to see the difference on 40 years of growth between a taxable account and tax deferred account, the difference is hundreds of thousands to millions of dollars. The accounts are for retirement purposes therefore to discourage use of funds for other needs the IRS imposed a tax penalty of 10% for any withdrawal done before after 59 1/2.
Roth retirement plan contributions are received into the plan after tax and the contributions grow tax deferred. This type of an account is attractive since distributions taken five years after the first contribution and after you have reached age 59 ½ are federal tax free. Once again the accounts are designed for retirement so the IRS imposes a tax penalty of 10% for any withdrawal done before after 59 1/2 (contributions can be withdrawal any time free of tax after each contribution is at least 5 years old).
Conclusion
The account structure that works best for you depends on many factors and a few assumptions like static tax rates for the next several decades. Some decide to just take the upfront benefit of paying less tax today and worry about the tax bill upon withdrawal. Others like the idea of growing a large pot which they will never have to pay tax on again (assuming the Government doesn't pass a new bill turning all Roth IRA accounts into Traditional as which point you will have been forced to pay taxes going in and going out. This lose lose is a probably event given the governments current finances and attractive target of Roth distributions.) My preferred strategy is 50/50. Half my retirement assets are being contributed to a traditional 401k and the other half goes to my Roth IRA. If the Roth IRA still exists in a few decades then I will have a choice on how much tax to pay each year.
Disclosure: I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. The information provided should NOT be considered advice. The topics discussed are risky and have the potential to lose a substantial amount. I am not an investment professional and therefore do not offer individual financial advice. Please do your own research before investing.
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