Roth

[Unregistered]

What is the best way to invest $20,000 in an IRA? The traditional way or a ROTH?
Can someone tell me the difference and the BEST way to go about it to invest it wisely for the future?

Thank you for any info about this.

PS Keep up the posting, it helps me alot!!!!!!

[Bees Knees]

For starters, you can’t contribute $20,000 into an IRA in one year, unless you are talking about rolling over a pension into an IRA. If that is the case, it can’t go into a Roth without first paying tax on all of the money, so I wouldn’t advise that.

Personally, I like eating my cake now, rather than putting it in the freezer to eat 20 years from now. A Roth IRA is like having to wait 20 years before receiving any benefit. Sure, you might get more cash in the end, but who can predict 20 years into the future? The traditional IRA gives you the benefit now by keeping the money pre-tax. You in essence allow money that would have been sent to the government in the form of taxes to remain in the account earning interest.

[sea-tax]

For starters, you can’t contribute $20,000 into an IRA in one year, unless you are talking about rolling over a pension into an IRA. If that is the case, it can’t go into a Roth without first paying tax on all of the money, so I wouldn’t advise that.

Personally, I like eating my cake now, rather than putting it in the freezer to eat 20 years from now. A Roth IRA is like having to wait 20 years before receiving any benefit. Sure, you might get more cash in the end, but who can predict 20 years into the future? The traditional IRA gives you the benefit now by keeping the money pre-tax. You in essence allow money that would have been sent to the government in the form of taxes to remain in the account earning interest.

Bees intersting explanation , infact my partner says the same thing . Politicians change their mind constantly how can you gurantee that when you retire the rules will still be the same.

I am not saying that I disagree but really I have not made my mind up yet. I look a Keough's they changed but yet clients who still have an old Keough can participate and take distributions and they are still taxed the same. Even though the rules for opening one have changed.

Maybe politicians will change the way a Roth is taxed 20 years from now, but what if they don't. I think ultimately the client needs to make the best decision with the information that they have now.

[DaveO]

A mix of assets is important.

I have both (Roth and Trad) and which I fund depends on the rest of my return. The ability to delay gratification is key to saving money in the first place. Forgoing a current benefit in anticipation of a future benefit is the logical extension of that. That said, there is nothing wrong with keeping funds in a taxable account as well. The money is liquid and there is no tax penalty for early withdrawal.

If this is a windfall and your desire is to salt it away for the future, good for you! My advice to clients in a similar situation is to buy a CD ladder in amounts equal to the contribution limit. In this case $4000. Time the renewal dates to match when you want to contribute the funds, after Jan 1 of each of the next 5 years. You would own a CD in the amount of $4000 Due 1/1/07, 08, 09 etc.

As each CD is cashed deposit the money in your IRA and treat yourself to dinner with the interest.

[Bees Knees]

Maybe politicians will change the way a Roth is taxed 20 years from now, but what if they don't.

Politicians changing their mind is just one aspect. The client's tax situation could change also. What if the client is in a low enough tax bracket where money can come out of that traditional IRA tax free? You never know. All of the projections that say the Roth will come out ahead assumes the client will be in a higher tax bracket at retirement, which isn't always the case.

The point is, you know what kind of tax benefit you get when you contribute today to a traditional IRA. That translates into hard cash that is not going to the government in the form of taxes.

You can only guess what the tax benefit will be 20 years from now, where an infinite number of possibilities could alter your projected savings.