The Do’s And Don’ts Of Tax-Based Financial Strategies With Matt Zagula – July 9, 2017

Guest: Matt Zagula
The first is how much you or your adviser believe that tax rates are likely to increase in the future between now and the time you withdraw your money. If your tax rate between now and the time you withdraw your money only goes up from 30 to let’s say 35 percent for example, then deferring taxes for 30 years with a 401K could very well be the best option. On the other hand, if taxes go from 30 percent well all the way up to 50 percent, then you probably would be better off paying taxes on the seed, in other words using the Roth IRA instead of the 401K but not so fast, why? Because there’s another variable to consider here which is, how much time you have to let that three thousand dollars that the IRS is loaning you grow. It may be 30 years but it might only be 10 or 15 as a general rule the longer the time, the less the tax rates have to increase in order for the Roth IRA to make more sense. To put it simply, if you have either a lot of time for your money to grow tax-deferred or you think tax rates are going to go up a lot between now and retirement, you might very well be better off paying taxes on the seed rather than the harvest. In other words, maybe the Roth makes more sense strategically than the 401k but that decision has to be unique for every individual. But, not so fast again another reason most workers and advisors almost default to the 401k is that the Roth has more limitations as to who can use it and how much they can contribute for example, the limitation on the Roth IRA currently is $5,500 if you’re under the age of 50 and $6,500 if you’re over the age of 50, and if your income is over a certain threshold, approximately a hundred and thirty-three thousand dollars, then you’re ineligible to open a Roth IRA anyway.
**Disclaimer: Sound Income Strategies, LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Past performance is not an indication of future results. Be sure to first consult with a qualified financial advisor or tax professional about your specific financial situation before implementing any strategy discussed herein.