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Roth IRA: Choosing Roth or Pretax Contributions

roth ira

Before planning for retirement, many retirement investors wonder if the best solution is to establish a Roth IRA or traditional IRA. On one hand, you have the Roth IRA, which allows you to make after-tax contributions. You will not receive an upfront tax-break in the case of a Roth, but you will not pay taxes when you take a distribution at retirement. Then there’s the option of pretax contributions, which does provide you with a tax break upfront, however you will have to pay for taxes when you take a distribution. 

The benefit of contributing to a Roth IRA is that your withdrawals during retirement are free of federal income tax if you meet certain requirements. This includes any earnings and gains on your Roth contributions.

Before you decide to establish a Roth IRA or a Traditional (pretax) IRA, consider this:

  • Higher Tax Bracket Now: If you feel your tax rate in retirement will be higher than your current tax rate, consider the Roth IRA.
  • Good Investments: Are you confident in your investments and expect a high return? If you’re confident in the security and growth of your investments, consider the Roth IRA.
  • Retirement Years: If your retirement years are far down the road, consider the tax-free gains and greater earning potential of your investments with the Roth IRA.

Pretax Considerations

 Pretax ContributionRoth contribution
Your ageGetting older potentially reduces the attractiveness of a RothThe younger you are Roth offers greater advantages
Need for current income tax deductionThe greater the need the greater benefit for a pretax contributionThe less the need the more attractive the Roth contribution becomes
Future tax ratesThe belief that tax rates will be lower when you retire increase the attractiveness of the pretax contributionThe belief that future tax rates will be higher increase attractiveness of Roth
Investment confidenceThe less confident you are in the stock market or your IRA investment options the more attractive the pretax account will be because at least you will benefit from a current tax deductionThe more confident you are in your investment returns and their growth over the years, the more attractive the Roth account becomes because all future appreciation will be tax-free

Self-Directed Roth IRA

With a self-directed retirement account, you have more control over your investment decisions, because you’re presented with investment opportunities otherwise not available to you. With a self-directed IRA comes the ability to invest in both traditional assets and non-traditional (alternative asset) investments. Alternative assets include real estate, precious metals, cryptocurrencies, tax liens and much more. 

You can make contributions in pretax and Roth. You will not receive an upfront tax-break, but all income and gains are tax-free when you take a distribution.

There are only two conditions you must meet to make a qualified distribution: 

  1. You must be at least 59 1/2 years of age 
  2. Your self-directed Roth IRA must be open for a minimum of five years 

Self-Directed Roth IRA Benefits: 

You have the benefits of diversification and being able to take a tax-free distribution. These, however, are not the only reasons for establishing a self-directed Roth IRA.  Other benefits include: 

  • Penalty-Free Contribution Withdrawals: You fund the IRA with after-tax dollars, therefore can withdraw your IRA funds anytime.
  • No Required Minimum Distribution (RMD): When you establish an after-tax self-directed IRA, you’re required to make withdrawals once you reach 73, but this is not the case with a self-directed Roth IRA. 
  • Estate Planning: With no RMD, you account funds can build, which you can then pass onto beneficiaries. 

The Decision Is Yours – But Make a Decision

No matter which retirement plan you choose, the important thing is to create a retirement plan. The benefits of choosing a self-directed retirement plan is that you can make investments you know well and trust. Additionally, when the market takes a dive, your retirement assets won’t drop as steadily. Allow IRA Financial Trust to custody the plan for you; give us a call at 800.472.1043 for more info!

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