Why Our Spiraling National Debt Makes the Roth IRA a No Brainer

by Joe Plemon on March 27, 2012

If you could lock in your gasoline price today with the guarantee that it will never go up, wouldn’t you do so?  Of course you would.  I wish I knew how, but I don’t.  However, I do know a way that you can lock in your income tax rates today so that you don’t have to worry about them escalating out of control when you need your retirement money.  It is called the Roth IRA.

Let me explain. With the traditional IRA, you get to deduct the contribution for the tax year it was made, but you will pay taxes when you start drawing the money out for retirement. The Roth IRA, on the other hand, is purchased after you have paid your taxes and is therefore tax free when withdrawn. When deciding which one is best for you, conventional wisdom is that if you believe you will be in a lower tax bracket when you retire, you are better off with the traditional IRA. Why? Because you were able to claim a tax deduction at a higher percentage, but pay those taxes later at a lower percentage.  A lower tax rate is normally assumed if your retirement income will be less than your working income.

But I ask: do you seriously believe that the tax structure when you retire will be essentially the same as it is today? Is it possible that even if your retirement income is less than your working income, your tax rate could be higher than today’s rates?

Why The Roth IRA is a Good Choice

Our current national debt is approaching $16 trillion and climbing by the second … nearly $50,000 per citizen.  As I see it, Congress has four possible choices of dealing with this debt:

  •  We could spend less than we make. A great choice, but nowhere on the radar.
  • We could print more money, but doing so will raise inflation rates, maybe to hyperinflation. Not a good choice.
  • We could sell more Treasury Bonds, but our national debt is making these bonds more and more risky. Besides, neither families or nations can borrow their way out of debt.
  • We can raise taxes.  Again, not a good choice, but, in my mind, the most likely one.

Our future tax structure is very uncertain because of our national crash course with debt. Are higher income taxes a certainty? No — but, in my thinking, they are a very high probability. If your retirement income is going to be about the same as your working income, or even a bit less, my recommendation is to lock in that tax rate now with a Roth IRA.  You will never, ever again need to concern yourself about future tax hikes.

That sounds like a great plan to me.

 

 

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{ 6 comments… read them below or add one }

krantcents March 27, 2012 at 2:00 pm

I like multiple income streams and I particularly like that I will have ordinary income, dividend income, capital gains income and tax free income. Now and in retirement.

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Joe Plemon March 27, 2012 at 2:23 pm

Diversification of income streams is a great plan, and obviously, you are utilizing it.

Readers: pay attention!

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David March 27, 2012 at 4:46 pm

This is something I am trying to do Joe, it is so much easier though not to diversify! I’m just lazy I think.

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Evan March 28, 2012 at 8:08 pm

I am all about hedging bets! So 401(k) and The Wife has a Roth for all the reasons you highlighted…

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Cedric March 28, 2012 at 8:51 pm

Joe, what are your thoughts about owning real estate in self-directed IRAs such as the ROTH IRA?

Thanks,

Cedric

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Joe Morgan April 11, 2012 at 12:15 pm

I wouldn’t count on the Roth staying tax free… with the epic amount of debt this country has run up in the last 4 years, future Congresses may not be able to pay it down even with higher rates. They may come looking for “new” sources of “revenue”.

Don’t get me wrong, the Roth is still a great idea …. for now.

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