Roth IRAs started in 1998. They are, in many ways, the exact opposite of the regular IRAs. (Please note, when I refer to regular IRAs, I am also talking about 401(k) and 403(b).) The amount you put in your Roth IRA each year is not deductible on your tax return. The benefit being that all the money you draw out during retirement is all tax-free.

All of my research and analysis shows me that giving up the tax deduction today, in order to get the benefit later, is the thing to do.

Try to picture yourself sitting in your living room at age 65. You have this large pile of $10s and $20s sitting in front of you on the floor, reaching all the way to the ceiling. This is your IRA. If you analyze this pile of cash, you will find that only a small portion is the actual money you contributed. Almost all of this pile is earnings. With the regular IRA, the entire pile is taxable, including the amount you put in. With the Roth IRA, you would have had to pay tax on that small portion you contributed many years ago, but the large portion of this pile of cash, your earnings, is totally tax-free.

I am willing to pay tax on that small portion today to make the rest of that pile tax-free. Again, all my analysis shows that you will end up with more money in your pocket during retirement with the Roth IRA. My analysis takes into account the time value of money, in that you are paying tax today that could be postponed for many years. But by not having to pay tax on that money during retirement, you will have more cash in the end.

There are other advantages to the Roth IRA that I have not mentioned. These include the fact that you can continue contributing beyond age 70 . You also are not required to take any distributions at any time. All or part of the Roth IRA money may be left in until you die, then passed on to your heirs, all the while retaining its tax-free status. These are all the exact opposite of a regular IRA.

Please note that there are various rules and requirements for the Roth IRA. Most of them are fairly basic, and not much different from regular IRAs. These requirements need to be considered before you make a decision.

In conclusion, I am not recommending that people abandon their 401(k) plans. There are advantages to the 401(k), such as your employer matching your contribution and much larger annual contribution limits. What I am suggesting is also doing the Roth IRA. Most people are allowed to do both, but not everyone. This gets back to the various rules and requirements I spoke of earlier.

A separate issue is converting regular IRA money into a Roth IRA. This is a difficult decision and involves a review of your individual tax situation. Please note that it can pay off nicely in the long run to convert a regular IRA, but it is not the right thing for everyone.

If you have any questions, please call me at 608-250-9926.