Social security is no longer a given and most pension plans have gone the way of the dodo bird, so investors are being forced to take more responsibility for the money they’ll have in their golden years. Which IRA is best for you and your exchange traded funds (ETFs)?
Individual retirement Accounts (IRAs) are accounts that investors set up to save for retirement. They come in various forms, including traditional IRAs and Roth IRAs. Karim Rahemtulla for Investment U reports that until this year, you couldn’t qualify for a Roth IRA unless you fell below specific income requirements. The government has now decreed that anyone can have a Roth IRA, regardless of their income level. Furthermore, if you have a traditional IRA, you can switch it over to a Roth – with all future gains and distributions being tax-free.
What are the benefits and consequences of investing in a Roth IRA account?
- Government: The government is angling for a lot of cash with this move. Think about the trillions of dollars sitting in retirement accounts. The lure of collecting taxes early on those trillions makes sense for a government in need. [Thinking about dividend ETFs?]
- Tax Implications: Any money you switch from your regular IRA to a Roth will be taxable – that’s the rub. Taxes will need to be paid at a marginal rate on this capital for the next few years.
- Status Quo: The easiest thing to do is let your traditional, tax-exempt IRA continue to grow and just pay the taxes at the marginal rate upon distribution. The money that you will pay today for the switch-over would likely make up what you’ll pay later in taxes, anyway. Your tax rate may be lower then, too. [What higher tax rates mean.]
We’re not tax professionals, however, so before proceeding, consult with your accountant to determine the best move for you and your future. [Our special report on 401(k) plans.]
For more stories about retirement, visit our retirement category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.