Don’t Go with the ROTH!

This 2020 tax season, we are seeing a lot of people contribute to ROTH IRA’s/401k’s when they should be contributing to a Pre-tax/Traditional retirement account.

It’s even worse when a financial professional convinces a new client to convert their pretax IRA/401k into a ROTH. This is throwing buckets of money out the window!

Here are two reasons why a ROTH is a bad idea:

  1. 99% of people make a lot less money in retirement. How do I know this? Because we have prepared a lot of tax returns. People need the deduction now, while they are making over six figures in a high tax bracket, not in retirement, when they are making $40k in a low tax bracket.
  2. Time Value of Money – Getting a deduction now is worth more than saving money 30 years from now, in retirement. Get the $10,000 deduction now!

Here’s an example: Let’s say a married couple made jointly $210,000 in 2020. If they each put $10,000 into their Employer’s pretax 401k, they would get a $20,000 deduction and pay about $4,800 less in taxes. $4,800 in 2020 is worth around $10,346 in 2046 with a 3% inflation rate.

The main point is this: money now is worth a lot more than money 25 – 30 years from now. People need deductions when they are making the big bucks, not in retirement, when they live off of their social security and their pensions.

Call your investment broker and make sure that your investments are structured correctly so you can take advantage of the deductions now. Make sure your financial advisor knows what they are doing when they recommend these types of investments to you. (We can recommend a couple of great financial advisors if needed).

Now go out there and show them what you’re made of! 😊

 

Article by: Josh Simpson, Iraq Veteran turned CPA and Owner of Simpson & Simpson Accounting