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A Savings Vehicle That Makes All the Difference

Missed Fortune – Should I Keep My Traditional IRA, or Convert to a Roth IRA?

Posted on | February 2, 2010

When it comes to savings and retirement vehicles, the traditional rhetoric is that you should put your money into “qualified plans” like 401(k)s and IRAs.

brokenpiggybank 200x300 Missed Fortune   Should I Keep My Traditional IRA, or Convert to a Roth IRA?For years, Americans have been socking away their investment money in accounts like these, following the crowd, hoping it would ensure the nest egg they want for the future.

The recent economic downturn has all but thrown out the egg and the nest from many Americans’ 401(k) and IRA accounts. Some have lost thousands—others hundreds of thousands—from their traditional retirement accounts.

Missed Fortune Clients are Safe

There are other people, however, who haven’t lost a dime—in fact, they’ve increased their wealth over the past couple years.

What do they know that you don’t?

These people have followed proven but unconventional investment strategies like those described in the Missed Fortune book series.

They know that qualified plans are qualified by the government. And the government is expert at ensuring it gets its money one way or another.

With a 401(k), for example, your taxes may be deferred on the money you invest, but when you withdraw your money after age 59½, you will be hit with taxes.

Higher Tax Bracket During Retirement?

You may be surprised to find that most Americans are in as high—if not higher—of a tax bracket when they retire than they were before. Why?

  1. Many of them have paid off their homes, so they no longer benefit from the itemized deduction of mortgage interest.
  2. They also no longer have dependents living with them, so they lose that tax advantage, as well.
  3. And while they were able to postpone taxes during the contribution years, when they start to withdraw their money in retirement, most people find they end up paying back ten to twenty times the amount of taxes saved during their contribution years.

Taxing the Seed vs. the Harvest

If you were a farmer, which would you rather do: 1) save tax on the purchase of your seed in the spring, then pay tax on the sale of your harvest in the fall, or 2) pay tax on the price of the seed, then sell your harvest without any tax on the gain?

Most of us would rather purchase the seed with after-tax dollars and later sell the harvest tax-free. You can learn how to do this now.

Now would certainly be better than tomorrow, or next month, or next year. Your accounts (hopefully) will likely be worth more in the future. And your taxes (unfortunately) will likely be higher.

Wouldn’t you rather get your taxes over and done with now? Especially if your accounts have lost money in the economic downturn, then right now makes more sense than ever to ditch the 401(k) or IRA.

So is a Roth IRA a Good Idea?

What about Roth IRAs or Roth 401(k)s? Many people say these are better from a tax standpoint. Indeed, one of the touted advantages of Roth plans is that you use after-tax money when you contribute, with no taxes on the distribution and withdrawals.

Currently about 13 percent of all IRAs and 401(k)s are Roth, and Congress recognizes more and more people are becoming interested in them.

Why? More people are realizing they would rather get their taxes over and done with now, rather than later. So every so often, Congress makes it appealing for people to convert their traditional 401(k)s and IRAs to Roth accounts.

In 2010, for example, the government will allow you to convert your traditional accounts to Roth accounts and spread the taxes over two years.

This isn’t just generosity on the government’s part. It’s a chance for the government to generate revenue, because when you convert your traditional IRAs and 401(k)s, you pay taxes on that money you transfer.

Again, this is nice, but it’s not out of kindness. It’s just smart business on Uncle Sam’s part—he needs money, and he’s happy to take yours in the form of more taxes.

Safer, More Profitable Alternatives

There are better alternatives for your retirement savings that have all of the advantages that Roth IRAs and 401(k)s offer, but also a considerable amount more.

Consider strategically converting your traditional IRAs and 401(k)s to maximum-funded, tax-advantaged index insurance contracts rather than to Roth accounts. Using indexing strategies, you can protect yourself from losses and still participate in any upside potential during good years.

Related Articles:

*Life insurance policies are not investments and, accordingly, should not be purchased as an investment

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