“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when you do indeed withdraw some or all of your money, you pay taxes (at your tax rate that year) on the total amount withdrawn from the IRA, including contributions and growth.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. 



Investing in a Traditional IRA will cause you to be taxed at a probable higher rate later on and on the growth accumulated in your account. Since its introduction in 1997, the Roth IRA has been extremely popular for just this reason. 



Another reason investors have been drawn to a Roth IRA is that there is no Required Minimum Distribution (RMD) required by the account owner.  However, many people do not realize that this benefit does not transfer to beneficiaries of the Roth, only the owner.



President Obama has proposed imposing the annual RMD on Roth IRA accounts as well as Traditional IRAs, as part of his 2015 fiscal budget.  This would be a game-changer for retirement planning and would make Roth IRAs less desirable for many investors. 



Margaret R. McDowell, ChFC, AIF, a syndicated economic columnist, chartered financial consultant and accredited investment fiduciary, is the founder of Arbor Wealth Management, LLC, (850-608-6121 — www.arborwealth.net), a “fee-only” and fiduciary registered investment advisory firm located near Sandestin. This column should not be considered personalized investment advice and provides no assurance that any specific strategy or investment will be suitable or profitable for an investor.