Spokane Journal of Business

Roth investing could curb future tax exposure

Fixed versus ARM loan analogy helps to decide

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Do you have, or are you considering using a traditional or Roth Individual Retirement Account or 401(k) to help fund your retirement? Do you ever wonder which is best or makes the right sense for you? Is it better to go with the Roth concept and make after-tax contributions and get tax-free income down the road, or is it better to make tax-deductible contributions with a traditional IRA or pre-tax contributions with a 401(k) now, let the money grow tax deferred, and pay taxes in retirement at the time of withdrawal?

I often use an analogy with my clients to help them make better sense of things. The analogy goes like this: If they are buying a home, or are about to, I ask them which kind of loan they think makes better sense for them—a fixed loan of 15 to 30 years with a level guaranteed interest rate, or an adjustable-rate mortgage.

Almost always they say they want the fixed one. When I ask why, they always say because they want to know exactly what they are getting and do not want the lender having the right to simply and arbitrarily raise their interest rates down the road. Makes sense, right? Most people feel this way.

I emphasize and remind my clients, with traditional 401(k)s and IRAs, their tax rates will be based upon the tax rates that are in place at THAT time by the government. Traditionally speaking, people have used this strategy, because it was thought that when you retire, you will be in a lower tax bracket. Really? Says who? Who has a crystal ball?

I also remind them how the Roth concept works, where they make contributions with after-tax money, and as long as they are at least 59½ and have had the account for at least five years, they can pull both their principal and the gains/interest earned 100 percent income tax free.

What we do know is that right now—and it’s been that way for a while—we are historically in a really low tax period, compared to other times in our history. For example, around 1944-1945, the highest bracket was over 90 percent. From 1951 to 1964, the highest bracket was right at about 90 percent. From 1969-1980, the highest bracket was about 70 percent the whole time.

Who’s to say, with our country being trillions of dollars in debt, taxes won’t again go sky high some day? If they do, is that when you will want to be pulling money out of that traditional 401(k) or IRA? Probably not, right?

But if you are at the age of 70½ and older, you must take a required minimum distribution, and if you don’t, the government will add insult to injury by not only making you pay the tax, but also adding a 50 percent penalty on the amount that should have been withdrawn.

The point is this: If you don’t want a flexible, adjustable-rate mortgage to prevent your lender from significantly raising your interest rates on your home loan, then why would you not want to apply this same philosophy to your decision on whether to use a traditional or Roth 401(k) or IRA?

For those who have the fortunate problem of making too much money to contribute to a Roth IRA, but still desire to do so, they may wish to take a serious hard look at using a specially designed indexed universal life insurance policy as a powerful alternative. In addition to providing a tax-free death benefit, such policies can accept large contributions without all the same restrictions and create substantial tax-free distributions. In addition, they can provide the upside of stock indexes like the S&P 500 without any of the downside market loss on a guaranteed basis.

Every person’s situation is different, of course, and one should look closely at things with their trusted insurance and financial advisers and accountants.

Todd Radwick, president of Radwick Financial Group LLC, of Winthrop, Wash., is an insurance and financial adviser and a 24-year industry veteran. He can be reached at 509-996-3425 • radwickfinancial.com • todd@radwickfinancial.com

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