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?