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The Roth IRA - Pay Now Or Later?

The Roth IRA - Pay Now Or Later?

December 06, 2022

 The Roth IRA and the traditional IRA are types of accounts; they are not actual investments like a stock or a mutual fund. The mere creation of a Roth IRA should not compel the need to alter your asset allocation or risk exposure any differently than you possess with your traditional IRA.

The risk involved in choosing a Roth IRA over a traditional IRA is paying an upfront tax which you may never recoup in future tax savings. Stripping away all the complexities of a Roth IRA comes down to a “pay now or pay later” question.

With the Roth IRA, the tax is paid in the year of converting a traditional IRA or making an annual contribution to a Roth IRA. Future withdrawals from the Roth IRA are tax-free¹.

With a traditional IRA, you don’t pay tax on contributions (pre-tax) or growth until the IRA funds are withdrawn.

¹Provided IRA owner is at least 59½, and the account has been opened for at least five years.


Today's unknown variable is what you would pay in future taxes without creating a Roth IRA and instead continue with a traditional IRA. If future rates are higher than today, or your tax situation creates higher taxable income, paying taxes on today's value and never paying taxes again would be a smart decision assuming other factors remain constant - income, deductions, credits, etc. But if future tax rates are lower or your tax situation is expected to produce lower taxable income, paying today's higher tax rates may not be such a great idea.

Another factor is time. The longer the period between when withdrawals begin and your eventual passing creates more chances of recouping upfront taxes paid. In addition, the beneficiaries of the Roth will be given the same tax-free treatment of withdrawals as the original owner had. The amount of future taxes saved would depend on your tax situation and rates. But as a general rule, the higher your future tax rate over your current rate, the greater tax relief you experience since the Roth distributions are tax-free. The idea is to accumulate greater tax savings over the upfront tax paid on the contribution or conversion. Whether creating a Roth IRA is a better strategy than keeping a traditional one cannot be determined until well into the future, possibly decades later.

Here is a summary of the possible benefits of opening a Roth IRA:

  • Avoiding Future Income Tax Deductions and Credit Limitations
    Some income tax deductions and credits are limited based on an individual’s (or couple’s) modified adjusted gross income² – medical deductions, educational credits, etc.). Since Roth IRA withdrawals are not considered income, you may qualify for greater deductions or credits than if you received taxable income from traditional IRA accounts.
    ² Your modified adjusted gross income (MAGI) is your adjusted gross income (AGI) plus additional items such as student loan interest, qualified education expenses, passive income or losses, IRA contributions, and foreign income.

  • Possibly Reduce Taxable Social Security Benefits
    The amount of your income³ each year determines the taxable portion of your social security benefits. Up to 85% of your benefits may be taxed each year. Traditional IRA distributions are taxable income and can increase the percentage of taxable benefits. Since Roth IRA distributions are not considered income, a lower percentage of social security benefits may be taxable. 
    ³ Income plus tax-exempt interest

  • Possibly Reduce Medicare B Premiums
    Medicare B premiums in 2022 for most people are $170.10 a month. The premiums may increase to over $500 per month based on an individual’s Modified Adjusted Gross Income (MAGI)². Roth IRA distributions are not included in MAGI.
    Medicare Premium/Income Chart

    No RMD is required.
  • Owners of traditional IRAs must take required minimum distributions (RMDs) beginning no later than April 1 of the year following the IRA owner’s 72nd birthday. According to IRS tables, the amount of RMD is based on the balance of the IRA on the last day of the preceding year and a person’s life expectancy. The amount of the RMD is included in income and could result in higher tax brackets, additional taxes, and premiums for social security and Medicare (see #2 and #3 above).
     Roth IRA owners are not required to receive minimum withdrawals from their accounts.

  • Beneficiaries get the same tax treatment for withdrawals.
    Traditional IRAs passed to spouses or non-spouses receive the same tax recognition for distributions: ordinary taxable income. Beneficiary IRAs, left to non-spouse heirs, must have their entire balance withdrawn within ten years of the original IRA owner’s death (exceptions apply). The compressed schedule will increase the distribution amounts and taxable income, which could trigger #(1) - #(4) above.
    Roth IRA distributions will remain tax-free for the beneficiary whether the funds are received in a lump sum or paid over a period of years (10-year maximum for a non-spouse).


The current tax schedule is set to expire at the end of 2025 and revert to the 2017 Tax Tables, which will increase tax rates. And even though political maneuvering can change future rates up or down, we cannot ignore our rapidly growing national debt, which stands at approximately 32 trillion dollars.  Eventually, we will acknowledge the damaging impact of rising deficits and focus on increasing revenue, which seems improbable without raising taxes.

Carr Wealth Management, LLC, can help perform the analysis to help determine if opening a Roth IRA by conversion for all or a portion of a traditional IRA makes sense for you. If you have an existing financial plan, we can help review and update the unknown variables, such as inflation, investment returns, and interest rates, to see if the plan to achieve your updated financial goals is still intact. We help create new plans using expert advice, decades of experience, and always acting in the fiduciary role to ensure your best interests are a priority.
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