When a Roth IRA Isn’t Right for You

While a Roth IRA is a great option since it provides tax-free distributions come retirement, it’s not right for everyone.  The younger generation can especially utilize a Roth since their earning potential will be greater in the future and in turn, their tax bracket will be much higher later on in life.  It’s best to pay the taxes now at your lower rate than it would be to pay them later on.

But what if you expect to be in a lower tax bracket later on in life?  In that case, a Roth isn’t right for you.  Contribute to a traditional IRA now and defer the taxes until retirement so you get the best rate.  If no retirement plan is available at work, your contributions are fully tax-deductible.  If you have a work-based retirement plan (such as a 401k), you can still get at least a partial deduction if you’re singe and earn less than $69,000 in 2013.  If you’re married and at least one of you has a retirement plan available to you, the max is $115,000 to get a tax deduction.

Next, if you have a large amount in rollover assets, a conversion to a Roth is not usually smart.  If you’re a high earner and cannot contribute directly to a Roth, you can do a backdoor Roth.  Here, you would contribute to a traditional IRA and then convert that into the Roth.  This move can lead to a higher than expected tax bill, if you have a large number of assets across all your IRA accounts (possibly because of a 401k rollover).  The taxes due on the conversion are based on the ratio of taxable and nontaxable assets across all of your IRA plans.

Another scenario is especially important for parents with teenagers.  When you convert to a Roth, this increases your taxable income which could impact your financial aid eligibility.  It’s best to do any type of conversion well before or after your children have finished school.

For older savers, the conversion to a Roth all depends on how much and how long you would need the money in the account.  If you’re not going to need the money to live off and you plan on leaving the plan to an heir, it’s a great idea to convert.  This will eliminate required minimum distributions and your beneficiaries will enjoy tax-free distributions.  However, older savers who will need the money sooner should stick with their traditional plan.  The tax benefits you get in the long run are not usually enough to offset the taxes paid on the conversion.

Finally, everyone’s situation is different.  You may be young and are already earning peak dollars.  You may be older but don’t have a lot of assets to worry about.  No matter your situation, the tax experts at the IRA Financial Group will help you decide which route is best for you.  Give them a call at 800.472.0646 or visit their website today!

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