This post is expanding on our last blog post that describes the differences between investing in pretax versus after tax retirement accounts. Now that you’ve read the differences, it’s time to figure out what may be best for you. The first step, is to see what you’re eligible for. There are several income restrictions and workplace circumstances that may affect how you contribute towards retirement. For example, depending on your income and if you have a workplace retirement plan, you may not be able to contribute to an outside Traditional IRA at all. Roth IRA’s are a little less restrictive, in that they only have an income restriction. In 2019, for married filing jointly, you may be able to contribute the full amount ($6,000 if you’re under age 50 and $7,000 if you’re 50 and older), as long as your adjusted gross income is below $193,000. It’s advised to speak further with a professional in order to see what your eligibility is exactly before making a contribution decision.

Another option if you don’t qualify for a Roth IRA, is a workplace 401(k). This type of account doesn’t carry the income restrictions that a Roth IRA has. More and more workplaces are adding a Roth option for their employees and this may be worth looking into.

After you find out your eligibility, it’s time to come to a decision. There is no simple answer though, as no one knows what the future will hold. Your current income, future income, future tax law changes, and tax brackets all play a factor. In general though, it may be worth thinking about diversifying your retirement income with a Roth if you expect to be in a similar tax bracket or higher tax bracket after you retire. This is because you would generally rather pay taxes now at a lower tax rate than in the future at a higher tax rate. The opposite goes for high income earners. Many high income earners may have a decrease in income once they retire. For that reason, it may be better to avoid the taxes today and pay them in retirement once they are in a lower tax bracket. But again, no one knows what the future will hold so we can only plan based on our knowledge today.

Another important thing to keep in mind is how your retirement income from your retirement accounts affects your future social security benefits. Pretax investments such as a Traditional IRA and pretax 401(k), may affect how your social security income is taxed. The Social Security Administration has a formula to figure out if your benefits will be taxed or not. The higher your income, the better chance at least 50% to 85% of your SS benefit may become taxable. For this reason, it may be advisable to start looking at investing in an after tax account such as a Roth IRA as they don’t count against you in the SS tax calculation.

If you’re wondering which option is best for you, our team of fee-only fiduciary advisors at Synergy Wealth Management are here to help you. Please give us a call today at 616-285-7818 or email us at team@synergywm.com. We are conveniently located at 660 Cascade W. Parkway SE in Grand Rapids, MI, right across from East Paris Avenue and Cascade Road.