TO ROTH, OR NOT TO ROTH? THAT'S A GOOD
Having grown up in the 80’s and working in financial services and education, when I hear “IRA”
I find myself vacillating between the Irish Republican Army (IRA) and the Individual Retirement Account
(IRA). So if this distinction alone confuses you, know that you’re not alone. But more importantly, when it
comes to saving for retirement knowing the basic differences between a “Roth” IRA and a “Traditional” IRA is
much more critical.
The Individual Retirement Account (IRA) is open to any individual to save for retirement.
Similar to a 401K plan offered by an employer, the Traditional IRA offers you a chance to put away money from
your paycheck PRE-tax. This money then grows over time in investments of your choosing, and when you retire
the money is distributed to you and is THEN taxed as income. The Roth IRA is a mirror image in that you
contribute money to it from out-of-pocket, in other words POST-tax dollars. The money in a Roth IRA grows
over time and when you retire the money is distributed TAX FREE since you already paid tax on those dollars
when you originally earned them.
The advantage of the Traditional IRA is that you can contribute money today and lower your
current tax burden. In fact, you will typically need to contribute more than 3% of your pay before you really
notice a difference in your take home pay. So, why on earth would you NOT want to save this money? If you
have a 401K (an employer sponsored retirement savings plan), the same is true as it works under the same
principles but could be even sweeter if your employer offers any kind of matching contributions. Most do, and
the match they offer is typically between 3-6% or more. That is “free” money which over the course of a
career could REALLY add up! There are some basic assumptions with the Traditional IRA. You are assuming that
you will be making LESS money after age 70, thus placing you in a lower income tax bracket upon retirement.
But if you do not retire, you may be forced to take distributions and thus add to your income and pay a
higher tax on the money you’ve been saving all these years.
The advantage of the Roth IRA is that you can bet on tax rates NOT going to be lower upon your
retirement. Should you still be earning a decent income, Roth IRA money can be distributed entirely tax free
and not affect your current year’s income. The interest earned throughout the life of a Roth IRA is also tax
free which can add more bang for the buck over the course of the investment. My personal belief is that
government will only be getting bigger and more expensive as the years go by, so don’t expect tax rates to
come down any time soon! The Roth is your best bet to hedge against this, a bet I personally am taking. I
love the concept of the Roth for as the markets gain I’m not earning money for the government.
So which IRA plan is for you? Well, how should I know? Most experts would probably say that
for most people, a combination of both is best. If you already participate in a 401K plan, open a Roth IRA
and save even more there. If you leave your employer, that 401K can be rolled into a Traditional IRA thus
giving you perhaps a wider menu of investment options.
When it comes to the investments themselves, do not fear. Most companies now offer “Age-based”
options which are basically like “Investing for dummies” (something I have found often out-performs most of
my other funds). Consult a trusted advisor, but pay attention to loads and fees. There are better deals
online and for do-it-yourself investing, but always be attentive to your potential risk. The Age-based funds
reallocate the money from higher risk to more conservative funds over the course of your work career, thus
helping to prevent any sort of drastic loss just prior to your retirement (that would REALLY not be a happy
IRA’s, of course, include restrictions such as income limitations, contribution limits, and
whether or not you also contribute to an employer plan. Lawyers, doctors, and other professionals may simply
earn too much money to contribute to an IRA. But these folks should check out my thoughts on Health Savings
Accounts (HSA’s) as a retirement savings vehicle.
All in all, the best advice I have about saving for retirement is to start early, save as much
as you can with a minimum target of 10% of your income, NEVER touch your savings, and diversify your
investments and your investment vehicles. Lastly, if your retirement plan consists of buying lottery tickets
and expecting Social Security to take care of you, keep dreaming. So, to Roth or not to Roth? To which I
What you might not have known, probably didn't need to know,
and quite possibly never really wanted to know in the first place...
What are they looking at?
I recently re-read Orwell's "1984" and I have to admit, it didn't freak me
out nearly as much as it had when I first read it twenty years ago. With our lives growing more and
more dependant on technology, we seem to be developing a "need" to be connected to it at all times.
And sometimes it is great! Money transactions can be conducted now with smart phones! Gone are the
days of "Get Smart" where we'd all be grabbing for our shoes in order to make a collect call! Now
we can deposit checks, pay for meals, chat, and conduct much of our business on a simple "smart"
phone! Don Adams would be proud! But with all this technology, there are concerns over privacy. The
federal government recently asked for more and easier access to cell phone company phone and text
records. Think Sting and, "Every call you make, every text you send, they'll be watching
So, what are "they" looking at? In "1984" Big Brother was looking at you, of course. And making
sure everything you said and did met with their expectations. So should we be concerned that most
intersections now have cameras watching us? Every store, street, and even web-cams in our homes all
have an eye and ear out for us. Personally, I'm trying to tune out the "neon God" for a while
from time to time, and listen carefully to Paul Simon's "Sounds of Silence". There's a lesson in
Who do they think THEY are?
just recently proclaimed that the "virtual world" was in fact real. Despite the oxymoronic
nature of this concept, this comes are good news to those who are addicted to computer
simulation games, Wi, and those infamous “reality” TV shows! Not to mention those who may have
been shy about banking online for fear that their money was no longer "real". But with the
"realness" of the virtual world now apparently confirmed, it is fair to believe that the concept
of virtual evil must also exist.
Be aware of online scams and "phishing" (gone are the days of the Andy Griffith Show and the
fishin' hole!). Financial institutions do not email you asking for your account information! Don’t
be one of those who willingly send your money overseas to someone in desperate need of a tuna fish
sandwich! Believe me, they are not in need of anything, they are con artists and they are very
“real”. If they ask you for any personal information, or to click to a web-site and "confirm" your
account information, DO NOT DO IT. Notify your financial institution, forward the email to them as
instructed, then delete it! Because the Pope and I have news for you, your "virtual" money is REAL,
and so are the criminals who want it.
as for reality, we’re still not entirely sure if that has been officially sanctioned by the Pope
as “real”. Personally, I have reason to believe nothing is really real anyway, it's all
relative, isn't it? Thanks a lot Einstein for breaking my heart!