Why I chose a Roth IRA

In an earlier post I wrote about IRAs and why everyone should have one.

I touched on why I had one but I didn’t go into too much detail. It is precisely this post I hope to explain why I chose the Roth IRA. So, let’s get right to it, shall we?

 

Reasons for choosing a ROTH IRA

Initially, I chose a Roth IRA because of the ability to put money in after tax, simply put. Allow me to explain further: If I had a stellar week at work (read: overtime) then I had the flexibility to add some of those extra earnings into my IRA. What that ultimately means is that I was able to have control of my money for longer. It was for simplicity sake that I elected to open a Roth IRA initially.

The opposite remains true, though, as well. If work wasn’t so good, I had unexpected expenses creep up on me, a bill was higher than normal or perhaps even something broke (appliance, plumbing, etc) then I had the freedom to use those funds for that instead of it automatically going into a traditional IRA.

Realistically, I should be totally honest: setting up and utilizing a Roth IRA takes less discipline. It really is that simple.

Although it’s that simple it isn’t the only reason I elected to open and continue contributing to the Roth IRA. Below I outline some additional reasons why I choose to continue contributing to the Roth, especially after I broadened my research into retirement vehicles.

I like the simplicity of the Roth IRA. This reason is closely linked with the first one above but it’s not quite the same. You see, if the traditional IRA was simpler then this reason would be a non starter but as it is it makes the Roth more attractive to me.

After I get paid I simply deposit money already taxed into the Roth IRA and that’s it. I don’t have to worry about pre tax money, how much i should elect to put in (as with traditional), or even how much I need to deduct from my taxes if I did contribute to a traditional IRA with after tax dollars. I simply deposit and continue on. I still have to keep an eye on my overall contribution rate to make sure I do not exceed $6,000 for the year 2019, but it is rather simple otherwise.

Another reason I choose to continue with my Roth IRA is the lack of RMDs. RMD stands for Regular Minimum Distribution and if you have a traditional IRA you have to begin taking contributions at 70 1/2, whether you need the money or not. Roth IRAs have no such rule. If you are good with your money and don’t need to tap into your Roth IRA in retirement then you don’t have to. That’s a good problem to have all things considered.

One question to ask: why does the government require RMDs with a traditional IRA?

Simple: they want their pound of flesh. With a traditional IRA you are postponing taxes until later and the government doesn’t care to wait forever. RMDs are designed for the government to get theirs. That’s why you HAVE to take them – whether you need the money or not. I suppose if you only expected to live until age 75 that’s ok but what if you lived until 90 or even 100? Suppose you didn’t need the money when you were 70 1/2 but because you have a traditional IRA you HAVE to begin taking it? Nevermind what you could do with the money once you begin taking it, how about the fact I’m interrupting the growth of my retirement nest egg by having to take RMDs.

To be fair, I’m willing to bet the number of people who would experience the above problem is small but it’s one of the reasons why I like a Roth over traditional IRA. And quite frankly, the ability to let your money continue growing without interruptions likey helps to alleviate the number one fear of retirees: outliving their money.

My next reason isn’t grounded in anything but a hunch, really. With having a Roth IRA, I’ve already paid taxes on my money, so it grows tax free. The traditional IRA, however, defers taxes until retirement. That is, you don’t pay taxes on your money until you draw it (hence the RMDs).

Now, conventional wisdom says if you’re going to make less in retirement than during your working years (which is most certainly true for most retirees) then going the traditional IRA route makes the most sense. After all, I don’t know anyone who likes paying taxes; how much more to overpay?

Now this is where those who advocate for traditional IRAs say: “your paying more in taxes now for the Roth IRA than you would in retirement with the traditional IRA!” With conventional wisdom I would agree. I mean, if simplicity wasn’t a reason and I were weighing absolute returns I can concede the point. But in my opinion there is more to it than the conventional wisdom we normally follow. Or perhaps I should say the conventional wisdom isn’t set in stone and liable to change.

How do we know the tax rates will stay at the levels they are now? More importantly, how do we know the tax rates for traditional IRAs won’t skyrocket in the coming years?

My hunch is that those rates will indeed be raised in the coming years. The reason: THE MASSIVE NATIONAL DEBT. Exactly how do you deal with $22 trillion? The trillions of dollars residing in traditional IRAs which have yet to be taxed will look exceedingly appetizing to a cash strapped and fiscally irresponsible government.

Of course, it’s possible to believe the government, if drastic measures were needed, could tax Roth retirement plans AGAIN but if that happened we would be in BAD SHAPE. No, seriously, it CAN’T be overstated just how BAD things would be if that happened.

It’s WAY easier to see them hiking the tax rate on traditional IRAs that haven’t been taxed yet.

Will they? That’s the million dollar question. I don’t know, but it’s my hunch they will. I honestly can’t see how they don’t all things considered.

Yet another objection from traditional IRA advocates would be postponing taxes allows a greater amount of money to grow via compounding. Perhaps that will be enough to offset the likely higher taxes for those in retirement should my hunch prove to be true, but coupled with simplicity I likely will stick with the Roth.

I should also mention I believe those who are retiring in the next 10 years are probably safe but as debt increases so does the likelihood of higher taxes. Say you have 30 years before you retire (that’s me); you may experience taxes like you have NEVER seen or heard of before.

Lastly, as I weighed the options of continuing to contribute to a Roth IRA or switch to a traditional one I looked at the retirement status of other accounts. My annuity fund (read my post on annuities & why skilled labor’s annuity funds are NOT what people think – the link is at the end of this post) is tax deferred. When I withdraw that money i will pay taxes on it. There are other retirement funds that will require tax paying upon drawing (pensions are another fund that comes to mind) and when I thought about it I figured I was more balanced in the grand scheme of things. That sounds strange but when I think LONG term AND what’s likely to happen I think it’s a good strategy.

In any case, I hope I’ve been clear as to why I’ve chosen to initially contribute to AND stay with a Roth IRA.

Total transparency here: I waver from time to time with my decision, think and rethink my positions, and generally try to re convince myself why I choose the Roth in the first place.

In the end we all make decisions based upon a myriad of factors, notwithstanding our own prejudices. I personally believe that simplicity alone is enough for me to not only chose a Roth IRA but continue contributing to it. Sure, it isn’t the only reason but were it so I would have still chosen the Roth.

In the end we all must choose something; and I can say with certainty the decision between traditional and Roth is better than the decision of nothing at all.

I certainly hope those in the skilled trades elect to contribute to an IRA; after all, it’s another vehicle for retirement and we can never have enough of those. Furthermore, I don’t believe we can afford to NOT save for retirement. Don’t let retirement just happen to you. Plan for it, be ready with a solid plan, and expect to continue honing your plan throughout the years as things change.

 

 

Read my post on the annuity funds skilled trades have and why they are different than what most advisors know.