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Should you put our money into a Roth IRA or a traditional IRA?

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Posted at 6:04 PM, Mar 18, 2021

We all have until April 15 to finalize our contributions to our 2020 IRAs, but many of us may be wondering: Do we put our money into a Roth IRA or a traditional IRA?

Carl Carlson, the CEO and Founder of Carlson Financial, has these three tips to help determine Roth versus traditional IRA contributions:

  1. Your income now versus your income in retirement
  2. Your Tax Bracket now versus your tax bracket in retirement
  3. IRS Tax rates now versus IRS tax rates in the future

When you consider whether to contribute your money to the Roth IRA or the traditional IRA, all you have to remember is: Low to high means, “eat Roth Pie,” he said.

Your income now versus your income in retirement

Sometimes people think, “How could I ever have more income in retirement?" Carlson sees it fairly often. He said what happens is maybe the spouse didn’t work much but does get Social Security, so maybe there are two Social Securities; maybe the working spouse ends up with two pensions and then if a significant amount of money has been saved over the years, then the money coming out of IRAs (which at some point is forced by the IRS by RMDs).

On the other hand, Carlson said the fact that Social Security is not taxable at all if that is the only income you have, and if you take money from a savings account or from a Roth IRA, then you aren’t paying any taxes in retirement.

Your Tax Bracket now versus your tax bracket in retirement

Carlson said to remember tax brackets can and have changed in the past, even in the recent past. Also, remember to consider strategies in retirement that could possibly put you in lower tax brackets.

IRS Tax rates now versus IRS tax rates in the future

Tax brackets may stay the same, but the tax rate within the tax bracket can be raised or lowered. Carlson added that recently tax rates were lowered under President Trump's tax bill. Current tax rates are automatically set to sunset in 2025 and go back to the previously higher tax rates.

Remember, when you consider whether to contribute your money to the Roth IRA or the traditional IRA, all you have to remember is: “Low to high means eat Roth Pie.”