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Jeff has referred to the Roth IRA as “the greatest thing since sliced bread” and I have to say, I agree wholeheartedly. Today I’d like to discuss how you can use a Roth IRA to maximize the amount of wealth you can generate. Read that last sentence as “minimize your taxes over time.” Who doesn’t want to minimize the amount of taxes you pay over time? Am I trying to tell you that depositing all your retirement savings into a Roth IRA, or converting as soon as you are permitted is not the best route for everyone? Exactly.
Let’s start with a quick explanation of Roth IRA vs traditional retirement accounts (this can be either an IRA or 401(k) as each offer the Roth variant). A traditional account permits you to take a tax deduction for deposits going into the account, in which the money would grow, tax-deferred, and taxed upon withdrawal at your prevailing marginal rate. The Roth account is a bit of a mirror image of this, the deposits are made with post-tax money, but both the growth and subsequent withdrawals are made tax free. In a sense, the decision comes down to one question – will you be in a higher tax rate at withdrawal time?
