RETIREMENT PLANNING AND THE GREAT IRA DEBATE

Dear IRA Investor,

There is no greater debate (meaning huge arguments) in retirement planning than the Traditional vs Roth IRA debate. So let me just say up front that in my opinion most Roth IRA's are a mistake. Now I am not here to argue where to put the money but in my opinion 95% of ROTH IRA's are a mistake.

Consider the following: A traditional IRA gives you a real, tangible, money in the pocket tax break today. Money you can invest, spend or if nothing else use to lower the actual cash it takes to fund your traditional IRA.

A Roth IRA makes a lot of assumptions about the future. You are assuming tax rates will be higher in the years ahead. Betting on changes in tax policy is rarely successful. Secondly I don't know anyone who is in a higher tax bracket when they retire than when they were working full time. Do you? Third 98% of the population will be withdrawing from their IRA accounts over years. Not all at once. Making the tax free withdraw of earnings in the ROTH less valuable.

It's obvious the Roth has a better public relations firm. Maybe the problem is the word Traditional. It sounds old and stodgy. But make no mistake that ROTH IRA contribution means you don't get a tax break now so the money stays with the government. While the tax break from the TRADITIONAL IRA stays with you.

The Roth IRA does have it's merits. But it should only be used once you have maxed out your pretax retirement plan contribution. Tax rates are historically low, I cannot argue that. But have you or anyone you know made predictions 10 20 or even 40 years in the future that have come true? That is the dilemma over the ROTH.

It may come down to that old saying a bird in the hand or two in the bush?

For me I will take the bird in the hand. The traditional IRA with the immediate tax savings and the ability to compound those savings over years is my preference. What's yours?

It’s worth factoring in some of the specific rules and benefits of traditional and Roth IRAs. Here’s a breakdown:

Traditional IRAs:

• Contributions to traditional IRAs lower your taxable income in the contribution year. That lowers your adjusted gross income, helping you qualify for other tax incentives you wouldn’t otherwise get, such as the child tax credit or the student loan interest deduction.
• Up to $10,000 can be withdrawn without the normal 10% early-withdrawal penalty to pay for qualified first-time home buyer expenses. However, you’ll pay taxes on the distribution.
  

Roth IRAs:

• Roth contributions (but not earnings) can be withdrawn penalty- and tax-free any time, even before age 59 ½.
• five tax years after the first contribution, you can withdraw up to $10,000 of Roth earnings penalty-free to pay for qualified first-time home buyer expenses.
  

Keep in mind that Congress can change these rules at any time. So while these are the rules today, they may be very different when you retire.

The type of individual retirement account you choose can significantly affect you and your family’s long-term savings. So it’s worth understanding the differences between traditional IRAs and Roth IRAs in order to select the best one for you.

As a financial planner that's my job. Let's pick the best one for you.

Yours Truly,

Steve

PS. Just for giggles let's do the math. If you are in the 20% federal and state bracket a 5K IRA contribution is a $1000 savings. A guaranteed 20 % return on investment. I like that math, how about you?...Steve

Steven K. Woodard Sr.

Financial Planner

Morganwood Ltd. 1578 S. Kihei Road, Kihei, HI 96753

Office 808-875-9887...Direct 808-298-4647