Tag Archives: roth ira

Roth vs. Traditional IRA: Have The Rules Changed?

For years, we’ve heard the same story when it comes to investing for your retirement. If you fall into the tax brackets where you can invest in a Roth IRA, do it. The theory’s always been that since you pay taxes on the front end of a Roth, allowing your investment to grow tax free, that you’d be able to make more money over time. That’s been especially true since 2001, when the first of the so-called Bush tax cuts (the official name is the Economic Growth and Tax Relief Reconciliation Act of 2001) became law.

But now that President Obama and Congress have permanently extended those tax cuts for 98 percent of us, have the rules of the game changed when it comes to investing in a Roth IRA compared to a traditional IRA?

Reviewing The New Tax Cuts

Since Congress didn’t pass new legislation on or before December 31, 2012, the Bush-era tax cuts were allowed to expire. For a day or two, they rebounded to the Clinton-era tax rates, before Congress and the President signed the new Obama tax legislation into law. In other words, these were truly tax cuts on income under $400,000 for individuals and $450,000 for families.

The Rules Haven’t Changed…But Everything Else Has

Although the rules for contributing to a Roth IRA haven’t changed – the contribution limit has gone up to a maximum of $5,500 per person ($6,500 for individuals age 50 or older) for the 2013 tax year – some investors are looking at their Roth accounts a little differently now.

Now that we have assurances on tax rates for years to come, the argument that you need to invest in a Roth instead of a traditional IRA because tax rates during your retirement years will be unpredictable doesn’t hold as much water. The fact is, if you qualify to contribute up to those limits into a Roth – meaning you make less than $178,000 as a married couple filing jointly or more than $112,000 for an individual – then your tax rates haven’t changed, and likely won’t (yes, this is a point of contention and debate politically, but this article isn’t about politics, it’s about investment strategies).

Will You Do Things Differently?

I’m still trying to decide for myself whether or not (1) I actually think the permanence of these tax cuts has the potential to affect retirement investments and (2) if I should change mine in any way to accommodate these new tax rates.

What do you think? Am I way off course here, or are any of you thinking of putting more pre-tax money into a traditional IRA instead of a Roth now that tax cuts for most of us have been “guaranteed” in perpetuity?

Taking The Investing Leap in 2012

Toward the end of 2011, I started planning my investments for 2012. Instead of investing over a long period of time, I let my money sit in my savings account because I didn’t want to pay taxes on my earnings. I was planning too much and not taking enough action.

My plan was to wait until 2012, and then invest the money in a Roth 401(k) (details about that coming in a future post) through my LLC. I was sitting on cash because I hadn’t been willing to invest it, and it was finally time to cash in.

The only problem, was that I wouldn’t exactly be liquidating my savings account, at least not for the long-term. Sure, the balance would drop, but I’m going to be replenishing it in 2012, and soon I’d be sitting on another pile of cash with no real plan.

I wanted to do all my investing in a Roth IRA, but the truth is that with $5,000 limits (and income limits that can prevent you from investing in a Roth IRA), I was going to have to join the rest of America and invest in a taxable account.

So I had to adjust my plan. There’s no day like today to start investing, so now I’m taking the plunge. And since I plan on making money from my day job and my side hustles in 2012, I’ll be using that money for the Roth 401(k). I won’t be able to make one lump deposit, but I will be smarter this year and invest every month (or quarter) so that I don’t end 2012 with cash that could have been making me money the entire year.

I believe that stocks will do really well in the long term and I want my money invested when the market skyrockets. However, that’s impossible if I sit on my cash and wait for the perfect investing conditions. Most of the time, doing something is far better than doing nothing. I finally took the leap, and I promise to be better in the future!

Readers, how dumb am I for waiting until 2012 to invest? Is it hard to part with the money in your bank and invest it?