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

Tip of the Day

  • Written by Guest Blogger | May 12, 2014

    When opening an account with a bank or credit union ask about overdraft, ATM & other fees that may be in fine print.

Saver Stories View all »

When You Start Small, Saving is Easy

Written by Lila Quintiliani | August 12, 2019

When Attiyya first got married, she and her Marine husband had just graduated from college and were focused on paying off student loan debt. They had both attended private schools and had sizeable loans. Then three months after the wedding, the couple found out they were pregnant with their first child.

The first year of their marriage, says Attiyya, was a balancing act between paying down debt and saving for the future.


Involving Kids in Family Finances

Written by | April 19, 2019


One of the best lessons we can share with our kids is about money. By middle school, kids should have a good understanding of how money works as well as the importance of saving.


Setting a Goal Leads to Success

Written by Super User | May 24, 2019

Growing up, Marisa’s dad had always talked about saving first, but she said she didn’t really internalize it until much later. “I was drifting along with no plan, carrying a little bit of revolving debt, saving some money here and there, but without a real plan for it.”