Traditional IRA vs ROTH IRA for 2018?
This week, we are going through an end of year personal finance checklist.
Yesterday we talked about tax loss harvesting to help save you money in taxes from your investments.
Today we are staying on the topic of taxes and looking at the difference between a ROTH IRA and a Traditional IRA. And helping you decide whether you should save money on taxes today with a traditional IRA contribution, or whether you should contribute to a ROTH and get the tax savings in the future.
For 2018, you can contribute up to $5,500 to a Roth IRA or traditional IRA, or $6,500 if you are over age 50.
You have until April 2019 to make 2018 contributions to these accounts, but the earlier the better, and with the recent volatility in the stock market, now could be a good time to top off these accounts if you haven’t already.
Contributing to a traditional IRA this year will help you save money in taxes this year if your household has a modified AGI of less than $121,000, or $73,000 if you are single. For those with income near these limits, contributions to a traditional IRA today will save you from paying the 22% federal tax rate on your contributions. So, a $5,500 contribution this year would save you about $1,200 in taxes. Which is great, and makes it an obvious choice for some investors today.
However, you will be taxed in the future when you withdrawal from the IRA at whatever the future income tax rate is. If tax rates rise in the future, you may have been better off using a ROTH.
A ROTH IRA will not save you on taxes this year, but you will pay no taxes when you withdrawal the money later in retirement.
The new tax law in 2018 changed a lot of things that I can’t go into too much detail here, but we have been advising younger clients in particular to use ROTH IRAs more. This is partially to offer clients a form of tax diversification since most have 401ks, but also because tax rates are set to automatically increase in the future, and its tough to imagine tax rates falling much further with the state of our government’s finances today.