Article: Fill 'Er Up! Roth or Regular?

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Frank Armstrong, is President and founder of Investor Solutions, Inc. He is a pioneer in integrating academically driven portfolio management techniques with institutional best practices for individual investors around the world. Frank has over 30 years experience in the securities and financial services industry. He holds a B.A. in Economics from the University of Virginia and is a CERTIFIED FINANCIAL PLANNER® practitioner.

If you are qualified for either a Roth or Regular IRA, which should you choose? Unfortunately, no one can give you an absolute answer, but here are some of the considerations: 

First, always remember that our government could change the tax laws at any time. A change to a flat tax, for instance, would probably be a disaster for Roth economics. What Uncle gives, he can take at any time. 

Having said that, if tax advantage is a driving factor for you, here are some tax guidelines:

• If you expect to be in a lower bracket after you retire than when you make the contribution, go for a regular IRA.
• If your tax bracket will be higher during withdrawal, a Roth IRA will end up with a higher value for you.
• If your tax bracket will be the same, there won't be a penny's worth of difference to you.
• So, as your income changes you may make different choices.

If you are in a very low tax bracket, the value of a "lost" or "wasted" deduction if small, so a Roth is a no-brainer. 

In most cases, Roth IRA's offer more flexibility than Regular.

• There are no forced distributions at age 70 ½. The lack of forced distributions should be very helpful to anyone fearing that their retirement accounts might be substantially depleted as they aged.
• You can continue to make contributions after 70 ½.
• Roth is a possible source for education or other large future expenses because you can always withdraw your contributions without penalty or tax. For instance, if you were to make a $2000 deposit each year after your child was born, you could withdraw $36,000 (or $72,000 for a couple depositing $4000 a year) without penalty or tax when the child reached 18. The remaining accumulation can continue to grow until you retire after age 59 ½. So, your funds are not tied up as they would be in a Regular IRA.
• Roth really shines as an estate planning tool. Especially if you think you may not need to spend the money during your lifetime, the ability to prepay income taxes for your next generation makes it worth far more than a traditional IRA. Unlike the traditional, the Roth can be conveniently used to satisfy the Uniform Credit amount. There is no wasted credit amount due to income tax.

You will notice I haven't mentioned non-deductible IRA's. That's because I don't think they are such a great idea. Here's why:

• There is no current tax deduction.
• Investments inside the non-deductible IRA will receive ordinary income tax upon distribution. So, you are giving up the opportunity to pay capital gains rates on your accumulations.
• If you really need your money before age 59 ½, you may be subject to the 10% early withdrawal penalty.
• You will be forced to make distributions at age 70 ½.
• Gains will be subject to income tax in your estate.
• Accounting for basis on withdrawal is an aggravating tax problem because all withdrawals must be apportioned between deductible and non-deductible accounts. Not fun.

So, to avoid the problems of non-deductible IRA's, in most cases I think investors would be better off in a total market index fund. 

If you are qualified for a Roth or regular IRA, by all means take advantage of it. Remember, a tax advantage is a terrible thing to waste!

Copyright (c) 2000 Frank Armstrong.

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