One of the great things about our retirement account system is that you have the chance to receive tax benefits for setting money aside for the future. This is a great thing, since the tax benefits allow you to grow your nest egg more efficiently.
The great debate for retirement plans is between the Traditional IRA and the Roth IRA. The Traditional IRA comes with a tax benefit right now, providing you with a deduction that lowers your taxable income. The Roth IRA doesn’t come with a tax benefit right now, but the money grows tax-free. That means you aren’t taxed on the returns in your account, so you withdraw the money without paying taxes. That doesn’t happen with the Traditional IRA, which requires that you pay taxes on your money when you withdraw.
One of the common bits of wisdom about the Traditional vs. Roth debate has to do with what you think will happen with taxes to determine which type of account to choose. The general consensus is to use a Roth if you think that your tax rate will be higher in the future. That way, you pay taxes now, at today’s lower tax rate, and avoid paying taxes on your gains during retirement.
But there are those who suggest that you don’t bother with the Roth at all, and their point is worth considering.
What If the Law Changes Before You Retire?
The reasoning against ever putting your money in a Roth IRA is based around the fact that Congress can decide to change the law before you retire. Right now, your earnings grow tax-free in a Roth, even though you don’t get an immediate tax return. But what if Congress decided to change the rules? What if they got rid of the tax-free growth feature, or added an income requirement to the tax-free withdrawals?
You never know what lawmakers will do in the future in an attempt to raise revenue. With debt spending the norm, many people expect that something will have to be done in the future — probably a combination of continuing to cut benefits and raising taxes.
When you consider this possibility, say some, it’s a good idea to ditch the Roth IRA and use a Traditional IRA. At least you know that you’ll get the tax benefit right now. You can lock in your tax benefit this year, and you don’t have to worry as much about not having that tax benefit later, since you’ve already taken advantage of it. Even if the tax law changes down the road and you no longer get the deduction for retirement plan contributions, you’ve at least got some good from it now.
It’s an interesting exercise in what might happen. If you think that the Roth IRA will lose its special advantage, then it does make sense to change things up a bit. However, if you think that lawmakers wouldn’t take away the tax-free growth of the Roth, you will need to stick with it. As always, it makes sense to consult with a knowledgeable professional to help you consider the options and make your decision.