Which Type of IRA Is Best: Pre-Tax or Roth?
Which Type of IRA Is Best: Pre-Tax or Roth?
When it comes to retirement savings account it’s the age-old question: pretax or Roth? For starters, no two situations are exactly alike, so there is no one-size-fits-all answer to this question. It will all depend on your situation and your financial goals. However, there are some factors to consider that will help you make the best determination.
Find Your Tax Bracket
To start, determine your tax bracket. If you’re starting your IRS early in life then chances are you’re in a lower tax bracket. If that’s the case, then it might be a good time to contribute to a Roth IRA. That means you put money in after you’ve already paid taxes on it. It means less money in your pocket, but it also means you pay taxes at a lower percentage so you’re not giving as much to the IRS. The plus side to this is that you get to enjoy tax-free withdrawals later in life even though the value of your contributions has increased.
High Earners Might Prefer a Traditional IRA
If you’re already in one of the highest tax brackets, then contributing to a traditional IRA, like a 401(k) plan might make more sense. This money comes out of your paycheck before your taxes, which means you pay a lower amount to the IRS. Furthermore, when you do finally start withdrawing from your IRA, chances are you will be in lower tax bracket. That’s because you will likely be done working and your income will be much lower. But that is not always the case, especially as more people are working later in life.
What About Tax Diversification?
This is another solid option. Essentially it means you don’t put all your eggs in one basket. Instead of contributing to just a single type of account, you invest in several different “buckets.” You can choose between pre-tax investments, like a 401(k), after-tax investments, like a Roth, and taxable investments, like buying stock. This money is contributed after-tax, like a Roth, but you pay tax on any gains you earn, either short-term or long-term. The amount will depend on which tax bracket you’re in and which type of gain it, based on how long you’ve owned the stock. The benefit of tax diversification is that you don’t get locked into one type of investment. This allows you a lot more flexibility as your financial situation changes.
Need More Help? Contact GROCO
Having an IRA is a good idea, no matter which type you choose. Additionally, for some people having both types of accounts is a good move. The bottom line, you have to weigh your options, evaluate your goals, and then choose the best method for you. Furthermore, your tax situation can change regularly so what’s best at one point might not be the best later on. In fact, it might make more sense to start with one type and later switch to the other. If you need additional help choosing how to save for retirement, then give a GROCO a call, or contact us online.
We hope you found this article about “Which Type of IRA Is Best: Pre-Tax or Roth?” helpful. If you have questions or need expert tax or family office advice that’s refreshingly objective (we never sell investments), please contact us or visit our Family office page or our website at www.GROCO.com. Unfortunately, we no longer give advice to other tax professionals gratis.
To receive our free newsletter, contact us here.
Subscribe to our YouTube Channel for more updates.
Alan Olsen, is the Host of the American Dreams Show and the Managing Partner of GROCO.com. GROCO is a premier family office and tax advisory firm located in the San Francisco Bay area serving clients all over the world.
Alan L. Olsen, CPA, Wikipedia Bio
GROCO.com is a proud sponsor of The American Dreams Show.
The American Dreams show was the brainchild of Alan Olsen, CPA, MBA. It was originally created to fill a specific need; often inexperienced entrepreneurs lacked basic information about raising capital and how to successfully start a business.
Alan sincerely wanted to respond to the many requests from aspiring entrepreneurs asking for the information and introductions they needed. But he had to find a way to help in which his venture capital clients and friends would not mind.
The American Dreams show became the solution, first as a radio show and now with YouTube videos as well. Always respectful of interview guest’s time, he’s able to give access to individuals information and inspiration previously inaccessible to the first-time entrepreneurs who need it most.
They can listen to venture capitalists and successful business people explain first-hand, how they got to where they are, how to start a company, how to overcome challenges, how they see the future evolving, opportunities, work-life balance and so much more..
American Dreams discusses many topics from some of the world’s most successful individuals about their secrets to life’s success. Topics from guest have included:
Creating purpose in life / Building a foundation for their life / Solving problems / Finding fulfillment through philanthropy and service / Becoming self-reliant / Enhancing effective leadership / Balancing family and work…
MyPaths.com (Also sponsored by GROCO) provides free access to content and world-class entrepreneurs, influencers and thought leaders’ personal success stories. To help you find your path in life to true, sustainable success & happiness. It’s mission statement:
In an increasingly complex and difficult world, we hope to help you find your personal path in life and build a strong foundation by learning how others found success and happiness. True and sustainable success and happiness are different for each one of us but possible, often despite significant challenges.
Our mission at MyPaths.com is to provide resources and firsthand accounts of how others found their paths in life, so you can do the same.
Have a Tax Issue With the IRS? You Could Always Take Them to Court
What would you do if the IRS makes a decision you don’t agree with? For example, let’s say you file a tax return and send it in expecting to receive a refund of $1,500. However, a few weeks later, instead of receiving your refund, you get a letter in the mail informing you that you…
Will Fewer Audits Lead to More Cheating?
There’s an old saying that cheaters never prosper. Of course, there are probably many people who have gotten away with cheating that would beg to differ. When it comes to taxes, however, it’s always best to avoid cheating. Surely, some people do get away with it, but if you ever get caught it could cost…
Could a Trust Be a Good Way for the Wealthy to Save on Taxes?
When you think of trusts, what comes to mind? While many people think of a financial account that is set up as part of an estate plan, there are a couple of little-known trusts that taxpayers, especially the wealthy, can use to help them save on their tax bill. These trusts are perfectly legal and…
How to Avoid Tax Preparation Scams
With so much to do and so many other important things to worry about, many people will be looking for help over the coming weeks and months with their income tax returns. While some people might just choose the first name they see to file their taxes, whom you choose can actually make a big…