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Roth IRA vs. Traditional IRA: Do You Trust Your Government?
Wednesday, 10 April 2013 10:38

For several years now, I've been telling my clients that there's not such thing as a permanent tax rate. They always change. The only questions are when, and how painful it will be.

A common dilemma for many Americans that are saving for retirement is which Individual Retirement Arrangement (IRA) to fund. If you're eligible, do you take the current income tax-deduction for contributions and then pay taxes later on retirement income with a Traditional IRA? Or do you pay the taxes on contributions now and hope that Uncle Sam keeps his promise to allow us to take retirement income from a Roth IRA tax free?

Many of my peers spend copious amounts of time modeling possible permutations of future tax rates, all while compounding their already wide range of errors by trying to predict the unpredictable investment returns from public securities markets.

I think the choice is simple:  Apply Occam's Razor.

The choice is really between these two extremes:

  1. What is known, and
  2. What is unknown.

What is known: A current income tax deduction (and possibly even an income tax credit).

What is unknown? Everything else.

In other words, "A bird in hand is worth two in the bush."

If a financial planner hands you a 50 page analysis of the Traditional IRA vs. Roth IRA decision, then the one thing you know for sure about your planner is this: They have no earthly idea what they are doing.

They are either trying to impress you with the "garbage in, garbage out" computer print outs and mind-numbing ledgers, or they are hoping that you miss out on the elusive obvious fact that they can't predict the future any better than a $2 Fortune Teller at a traveling carnival.

For those that think "That will never happen here" when I mention the possibility of your Roth IRA distributions becoming taxable, then I suggest you open your eyes to the world around you:

Austrailia "Double Dipping" on Retirement Super Tax April 6, 2013

Not only is retirement plan confiscation under the guise of so-called "fair" taxation possible, it's part of the ongoing political debate among our critters in Congress, and inside the walls of the current Administration:

Does President Obama Want to Tax Your Retirement? April 8, 2013

The pundits that pooh-pooh the idea of the American government confiscating IRAs and other retirement plans are the same self-anointed gurus that were touting dot com stocks in early 2000, and recommending NINJA mortgages for the largest house one could swing the payment for in 2007. These same investment soothsayers were pushing residential real estate as a suitable investment for the lay public, while ignoring historical returns. They were aided by willfully ignorant politicians who are clearly guilty of misleading the electorate when they were saying that Fannie Mae and Freddie Mac were financially solid. They were all tragically wrong.

The one fact that is known, because it is proven by history, repeatedly: We cannot trust the government to deliver on any promise made today.

I'll take the bird in hand.

 

Brent D. Gardner, CLU, ChFC