By Leanna C. Rahll, CFP®

In 1789, Benjamin Franklin wrote to a friend “in this world nothing can be said to be certain, except death and taxes”.  Some things haven’t changed.   But the government has created tax-advantaged retirement accounts to help you grow your wealth.

First came Traditional IRAs, 401(k)s and other employers-sponsored plans that allow you to contribute pre-tax dollars that grow tax-deferred, with income taxes paid upon withdrawal.  That tax-deferred piece, allowing your investment to grow without being nickeled-and-dimed with taxes each year, is important.  When your portfolio is small, investment income may not be significant.  But in the future, when you have $500,000 or $1 million, that portfolio income may knock you into a higher marginal tax bracket.

Next came ROTH IRAs, ROTH 401(k)s, 403(b)s, etc. and the ROTH TSP where you contribute after –tax dollars.  As long as you take the money out for a qualified reason…  you never pay taxes again!

Determining which is right for you, whether to pay taxes now or postpone until later impacts the wealth you accumulate.  The goal is to minimize your taxes over your lifetime.  After all, the less you pay, the more you keep!  The more you keep equals more financial security.

So ask yourself…
·    Do I think I am in a lower tax bracket now than I will be in the future?
·    Would I rather pay taxes on the seed or the harvest?

Generally the younger you are (the more time your investment has to grow) and the lower your tax bracket (you don’t benefit much from a pre-tax contribution when in low marginal tax bracket), the more sense a ROTH makes.

But I can make as strong case for the ROTH in any tax bracket as you get the growth for free!

You have until 15 April to maximize a ROTH IRA at $5000 for 2012 (+$1000 catch up for those 50 or over).  The contribution limit increases to $5500 for 2013. 

For more information:
Saving for Retirement
Thrift Savings Plan Roth Option
Get Rich Slow: Maximizing Your Retirement in 2013

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