Pay me now or pay me later: traditional vs. Roth IRAs

Margaret R. McDowell

Margaret R. McDowell

Special to The Log
Published: Sunday, April 20, 2014 at 05:26 PM.

“Pay Me My Money Down”

Traditional Georgia Sea Island stevedores song

Years ago, Fram automotive products developed an extremely effective marketing campaign for its oil filters. The commercial pictured a distraught motorist having his engine replaced, ostensibly because he didn’t change his oil and filter regularly. The mechanic holds up a new oil filter and tells the customer:  “You can pay me now, or pay me later.”

Utilizing Traditional and Roth IRAs is somewhat analogous: you can pay Uncle Sam today, or pay him down the road. 

With a traditional or “back end” IRA, one doesn’t pay taxes until such time as withdrawals (called distributions) are made. But when you do indeed withdraw some or all of your money, you pay taxes (at your tax rate that year) on the total amount withdrawn from the IRA, including contributions and growth.  

With a Roth or “front end” IRA, you pay income tax now on contributions, just as you would on other income, and never pay taxes again on these funds, assuming you have held the Roth IRA account for a period of no less than five years and you have reached age 59½. This is one of the advantages of contributing to a Roth IRA: taxes are likely to increase, so you are paying taxes today at a lesser rate. While intended for retirement use, you may withdraw your contributions to a Roth account both penalty and tax-free at any time. However, any growth on the account would be both penalized and taxed if you do not meet the two requirements shown above.

Roth IRAs are an attractive retirement funding option for younger earners who plan on a growing income. The Roth allows you to ‘lock in’ today’s income tax rates and your tax bracket  Most of us would rather pay taxes on our Roth contributions when we’re in a 20 percent tax bracket than pay when we enter the 35 percent tax bracket. 

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