• Skip to navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer

American Academy of Estate Planning Attorneys

AAEPA, Inc

Find a Member Member's Login
Call Today (800) 846-1555
  • Membership
    • Membership Membership
    • submenu
      • Why Join?
      • Member Requirements
      • Become A Member
      • Meet the Team
  • Estate planning software
  • Education
  • Practice management
    • Practice management Practice Management
    • submenu
      • 11 Essential Systems
      • Coaching
      • Law Firm Marketing
  • Resources
    • Resources Resources
    • submenu
      • Live Training
      • Blog
  • Contact Us

Choosing a Roth or Traditional IRA (or 401k)

Home » referrals » Choosing a Roth or Traditional IRA (or 401k)

This is another in a series of blogs on the basics of estate planning. In this blog, we’ll look at the differences between a Roth and a traditional IRA (or 401k). We’ll also look at considerations in choosing between them.

With a traditional IRA (or 401k), you make a contribution and that amount is not included in your taxable income for the year. Contributions are limited to $5,500 (plus $1,000 if over age 55) for an IRA (or $18,000 (plus $6,000 if over age 55) for a 401k). When you take distributions from the traditional IRA (or 401k), the amount of the distribution, which may include the original contribution or earnings thereon, is taxed as ordinary income. Generally, Roth IRA (and 401k) distributions are not taxable, including all the earnings on the contributions.

With either one there are penalties for taking distributions prior to age 59 ½, unless an exception applies. With a traditional IRA (or 401k), you must start taking required minimum distributions once you reach age 70 ½, while with a Roth IRA (or 401k) you need take no distributions during your lifetime. This makes the Roth much more flexible from an income tax planning perspective. After death, the same rules apply regarding distributions to beneficiaries. Of course, the Roth distributions will not be included in the beneficiary’s income while the traditional distributions will be.

Generally, if you expect your taxable earnings and rate of taxation to be lower in retirement, you may lean toward contribution to a traditional account. On the other hand, if you expect the rate of taxation to be higher years down the road in retirement, you may lean toward a contribution to a Roth account.

Assets in a traditional or Roth 401k are completely exempt in bankruptcy. Assets in a traditional or Roth IRA are exempt in bankruptcy up to at least $1 million. Thus, if you have asset protection concerns, you’ll likely want to maximize your contributions. Effectively, by using a Roth vehicle, you are contributing greater value to the plan because each dollar contributed has the taxes pre-paid. Whereas with a traditional vehicle, the future income taxes have yet to be paid. Thus, if you have $100,000 in a traditional vehicle and it will be taxed at 30% upon withdrawal, the after-tax value will be $70,000. On the other hand, if you have $100,000 in a Roth account, even after distribution it is still worth $100,000.

If you have a taxable estate, you may want to consider a Roth vehicle. Let’s say you have an estate that exceeds the estate tax exclusion by $500,000. Thus, your estate would pay $200,000 in estate tax (after a 40% federal estate tax). Let’s say part of your portfolio is a $1,500,000 traditional IRA. Let’s say you could Roth that IRA by taking it into income and paying 1/3, or $500,000, in tax (perhaps over a couple years). By doing so, you would bring your estate down to the exclusion amount and remove the estate tax problem without reducing the value of your assets. Basically, all you’ve done is pre-paid the income tax you or your beneficiaries would have to pay, and by so doing, you would have saved $200,000 in estate taxation.

There are many advantages to saving for retirement. Carefully consider whether a traditional or Roth IRA (or 401k) is right for you or your client.

In upcoming blogs, I’ll discuss more on the basics of estate planning.

Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com

  • Author
  • Recent Posts
Steve Hartnett
Steve Hartnett
Director of Education, American Academy of Estate Planning Attorneys
Steve Hartnett
Latest posts by Steve Hartnett (see all)
  • Double Your Gifting with Spousal Gift-Splitting - January 11, 2022
  • Tax Planning for 2022 - December 28, 2021
  • Donor Advised Funds: Too Good to Be True? - August 10, 2021
SHARE

About Steve Hartnett

Director of Education, American Academy of Estate Planning Attorneys

Primary Sidebar

Subscribe to our blog

Recent Posts

  • Spring Summit 2022: Celebrating Friendship in the Lone Star State
  • Aging Parents and Estate Planning
  • How Do I Title Thee…Part I
  • Turning Stalled Out Goals into Actions
  • What Makes a Will or Trust Invalid

Categories

  • Academy Girl Friday (33)
  • Client Services (238)
  • Coaching (33)
  • Consumer Advantage (3)
  • Counseling (21)
  • Elder Law (5)
  • Estate Planning (921)
  • Estate Planning Documents (5)
  • Estate Planning Education (199)
  • Financial Analysis (3)
  • Financial Services (1)
  • General (19)
  • Law Firm Marketing (281)
  • Law Firm Net Revenue (7)
  • Law Firm Staffing (99)
  • Law Firm Technology (45)
  • Law Firm Web Tips (185)
  • Leadership (191)
  • Legal Education (646)
  • Marketing Tools (2)
  • Medicaid (1)
  • Member Services (1)
  • Owners Compensation (1)
  • Peak Performer Focus (1)
  • Practice Building Calls (1)
  • Practice Management (496)
  • SEO/Social Media Support (3)
  • Software (6)
  • Strategic Planning (9)
  • Uncategorized (15)

Footer

logo of American Academy of Estate Planning Attorneys

About Us

  • Meet the Team
  • Site Map
  • Legal Notice
  • Privacy Policy

Explore Our Services

  • Coaching
  • Estate planning software
  • Events
  • Legal education
  • Marketing
  • Web and SEO

Keep in Touch

Mon-Fri

9444 Balboa Ave. Suite 300

San Diego

(800) 846-1555

info@aaepa.com

Take Back Control of Your Business and Your Life

+

footer section | American Academy of Estate Planning Attorneys

© 2022 American Academy of Estate Planning Attorneys, Inc All rights reserved.

We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. By clicking “Accept All”, you consent to the use of ALL the cookies. However, you may visit "Cookie Settings" to provide a controlled consent. Don't sell my personal information.
Cookie Settings Accept All
Manage consent

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary
Always Enabled
Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
CookieDurationDescription
cookielawinfo-checkbox-analytics11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
cookielawinfo-checkbox-functional11 monthsThe cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
cookielawinfo-checkbox-necessary11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
cookielawinfo-checkbox-others11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
cookielawinfo-checkbox-performance11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
viewed_cookie_policy11 monthsThe cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.
Functional
Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
Performance
Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
Analytics
Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
Advertisement
Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.
Others
Other uncategorized cookies are those that are being analyzed and have not been classified into a category as yet.
Save & Accept