Should I Contribute To My Roth IRA Vs My Traditional IRA?

Updated: Nov 28

When saving for retirement, clients will often ask which account they should be making contributions to – a traditional IRA or a Roth IRA? The answer depends on several different factors that should be considered and discussed.


To assist in this conversation, we have prepared the “Should I Contribute To My Roth IRA Vs. My Traditional IRA?” flowchart. This flowchart considers:

  • Eligibility to deduct contributions to a traditional IRA

  • Eligibility to make contributions to a Roth IRA

  • Current tax rates vs. future tax rates

  • Ability to max out the contributions

  • RMD impact

Transcript:

Hi, Todd Pouliot, Gateway Financial. Feel free to visit us at www.mygatewaymoney.com. Got a very good flow chart for you today, one that we discuss quite often. And, today we're going to talk about, “Should I Contribute To My Roth IRA Vs. My Traditional IRA”? When saving for retirement, clients often ask which account they should be making a contribution to – a traditional IRA or a Roth IRA? And, as usual, the answer depends on several different factors that should be considered. And, we’ve got this flowchart – we're going to cover several different areas for you today, so follow along with us. Make sure you subscribe and hit that thumbs-up button – we really appreciate that. It helps us with the algorithm here on YouTube. Eligibility to deduct contributions to a traditional IRA. Eligibility to deduct contributions to a Roth IRA. Current rates versus future tax rates. Ability to max out the contribution. And, RMD impact or required minimum distributions. And, as we always do, we’re going to share our screen with you, and follow along. Are you eligible to contribute to a Roth IRA and a traditional IRA? Yes or no? Again, always logic statements. If the answer is no, you can only make a non-deductible traditional IRA contribution. Consider making a backdoor Roth IRA contribution. Again, that’s a very complicated situation. Please look at our video regarding back-door Roths. And, obviously, within the last year, we’ve had a lot of scares that maybe this tax planning strategy may be going away. So, we always want to make sure we're updated on the latest regulations and IRS tax laws. So, the backdoor Roth IRA contribution is a great idea, make sure to watch that video as well. If you are able to contribute to a traditional IRA, are you eligible to deduct your traditional IRA contribution? So, as we have here – we have a CPA in our office. We want to make sure we’re working with somebody closely about those deductions, and a lot of those have to do with income limits. So, here we are in 20202, understand what those laws are currently, and in 2023 if there are any changes to the amounts and as we go forward. This is a great one here, this is a comment and question that we always sit and talk a lot about. Do you expect your future marginal tax rate to be higher than your current tax rates? So again, 12 months ago we were discussing a possible increase in tax rates, now here we are and we're not talking about increasing tax rates for the current year or next year. But remember, the vital point is the 2017 tax cuts and job act is going to sunset in 2025 – no matter if there is a change or not, we know that that change is going to happen, which means that there will be an increase in tax rates. So, do you expect those tax rates to be higher? Yes. Consider making a contribution to your Roth IRA. We can have political discussions about this. We can have theoretical discussions about this. Or we can actually talk about what is going to happen. If no, consider making a contribution to your traditional IRA. Again, this is called tax planning. Tax preparation by your CPA or you're enrolled agent is just looking backward, tax planning looks forward. Make sure you understand those differences. The dollars you contribute will be deductible now at higher rates. In the future, eligible distributions will be taxed when you are presumably in a lower tax bracket. We can talk about tax decrease in the marginal tax rate or we can talk about your income rate currently versus what it may be in retirement. Again, this is tax planning – follow this through. If you have any low-income years you could consider doing a partial Roth conversion to fill up the lower tax brackets. What we mean by that is, if you use our planning software, your income level’s here, and then it drops at retirement and then possibly increases again later – let's assume age 70 with social security or age 72 with RMDs. That valley we want to fill up. Again, the goal is not to have the lowest tax burden each and every year, it's to have the lowest tax burden throughout your entire lifetime. That's the key to tax planning and financial planning. So, let's come back over here because we're going to end up in the same spot. The dollars you contribute will be taxable now, so this is the Roth IRA – at the lower rates– in the future, eligible distribution will be tax-free when you are presumably in a higher tax bracket. Will you need retirement income from your IRAs? Will you need it, and will you do it? No. Consider making a contribution to your Roth IRA, which is not subject to RMDs. Again, not subject to the required minimum distributions. This is a big planning strategy for people. We've got some clients who are in very very high tax brackets, then we hit the lower tax brackets, do that Roth conversion and at some point in the future, if all their money is in a Roth, they’ll have virtually a 0% tax. That is a wonderful planning strategy for some people. Not everyone can be at zero, we obviously need to have some sort of income tax, but if you’re in that situation – boy, that sounds wonderful at some point in the future when you're in your seventies or eighties or nineties to pay zero tax on those dollars. So, over here, do you want to maximize the contribution amount and can you afford to make the full annual contribution? Again, that for this year is 6000 or 7,000 if you’re age 50 or over. Don't forget, I did talk about the backdoor Roth. Don't forget about the mega backdoor Roth. Again, those are awesome planning strategies if you can take advantage of them. So, yes I can. Consider making an after-tax contribution to your Roth IRA. The tax is paid with outside dollars on top of the contribution amount. And then, no. Consider making a partial contribution to your traditional IRA, so you can receive a tax deduction now. Be mindful, you will have to pay taxes in the future upon distribution. Boy, what a great thing to talk about. Now, do we solve any of the world's issues today? No. But understanding that having a plan is better than nothing. And, the best thing is, you might not be able to do all or nothing. And, in a lot of cases, all or nothing is not the right plan. Having a balanced plan is the right plan. Remember, you are going to have some income streams possibly from Social Security, possibly from a pension, a thrift savings plan, a 403(b) – you're going to have some income from somewhere. So, balancing that income with a tax-free Roth income may be the plan for you. So, we want to have a three-legged stool, but we want to make sure it's even so we're not leaning too far one way or the other and make sure we have a proper plan set up for income as you move forward in your career and income as you move forward in retirement so you retire with dignity and stay retired it with dignity. So, thanks again for coming to visit us. mygatewaymoney.com is our website. Hopefully, you've got a chance to see the new pricing tool that we've added online to our website. We really think transparency and trust are the true basis for a great relationship with our clients and we hope you're willing to take that chance with us and become a client of ours at some point in the future. Again, thumbs-up, I appreciate you, subscribers. We appreciate you and we hope you have a great day and be well.

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