Making financial decisions about your retirement can be confusing and overwhelming with so many options to choose from. For example, when looking at IRA retirement solutions, which is better in the Roth vs. traditional IRA debate? To understand the difference between tax money that grows tax-free and pre-tax money growing tax-deferred, be smart and exercise your due diligence by consulting an expert. Here, David Moore, with IRA Advantage, explains the difference between these two very distinct investment vehicles.

David, why should I consider a Roth versus traditional IRA?

David, why should I consider a Roth versus traditional IRA?

Well, you have to understand the difference between the two. Initially, a Roth IRA is going to be tax money that grows tax-free through the investment cycle. A traditional is pre-tax money growing tax-deferred. The thing that’s different about retirement accounts is that you pay normal income tax on distribution at the end of the day. So Roth money, if you’re young, you’re growing the account. Or if you’re buying something that’s going to have explosive growth, obviously, a Roth is a great situation for you. If you’re looking at converting, you sort of have to look at the investments, what’s happening with those, what you anticipate happening, how old you are, etc. And ultimately, government threw Roths out there as an idea that, hey, we’re going to have people converting accounts, we’re going to get access to tax revenue today that we wouldn’t get in a traditional format ‘til way in the future. So maybe not as much of that conversion occurred as they probably anticipated initially.

Why Should I Consider a Roth vs. Traditional IRA

One of the custodians told me a story of somebody starting a tech fund for a couple thousand dollars with a Roth and selling it for a billion dollars. Well, that’s a tax-free deal. That’s a very, very attractive thing. But if I’m in my 60’s and I’m looking at a choice between using traditional money, converting to a Roth, or just simply taking that money out, at 59-1/2 you can take in service distributions without a penalty. But you’d really have to look at the asset, look at what you have, and say, “Okay. Do I want to do a conversion from traditional to Roth and still have all the strings that are attached with a retirement account or just to simply do a distribution of the asset and pull it out?” It’s something where you really have to sharpen your pencil, work with your tax people, figure out what the tax ramifications are, and when to do it. If you’re going to make these conversions or take distributions, there’s always tax planning. Whatever is in your account has to come out at some point. So how do you get it out with the least possible tax exposure?

David, how do they compare as IRA retirement solutions?

Well, I sort of covered that question just a minute ago. We’re really just looking at whether it’s pre-tax money growing tax-deferred, or tax money growing tax-free. I guess the other thing I need to point out is, if we’re talking about a real estate investment, it’s leveraged. Somebody might do a Roth conversion thinking, “Hey, I don’t have any tax exposure on this thing, period.” Well, if you’re flipping, you’re going to have some tax subject to UBIT or UBTI. And if you’ve got a leveraged investment, number one, can you finance a property owned by a retirement account? The answer’s, “Yes, but it’s got to be a non-recourse IRA compliant, IRA 401K compliant loan.” Even Roth IRAs, you’re going to have tax exposure on the debt-financed income or gain. What that means is any income or gain attributable to that loan, you’ve got exposure on. 401K plans are different. You don’t have that with that debt-financed income or gain. There’s a big difference between those two investment vehicles.

Truly understanding what your retirement options are takes the help of an expert. A simple call to IRA Advantage will get you the advice you need. Give us a call today, 503-619-0223.