Hi EnLifers! So, we paid off the student loan!! Woo-hoo! Now on to other things. At this point, the only debt we have right now is one more student loan which is currently being paid by our employer and our house. So now our attention has turned to what to do next. One of the things we’ve discussed and I’ve heard a lot about via podcasts over the years are ROTH IRAs. What is a ROTH IRA? First, IRA is short for Individual Retirement Account, so basically it is a way/tool to save for retirement instead of or in addition to whatever plans your employer may have with some income restrictions (see this link at irs.gov for additional details). IRAs are generally tax-advantaged in that you can deduct your contributions to the IRA on your income tax return and the IRS does not consider it income. However, when you withdraw money in retirement, you will pay taxes on those withdrawals. Now, the difference in a regular IRA and a ROTH IRA is that you pay taxes on your contributions in the present. That way, when you retire you can withdraw your money (including the growth) tax-free. There are some income restrictions with ROTHs too, basically you can’t make over a certain amount in order to take advantage of it.
So for the longest time, I’d heard that ROTHs were the way to go and now circumstances actually allow for me to contribute. The thing is, I’m not sure if it’s the best deal. Hear me out. So, I actually changed to the ROTH option at my job for a couple of years once our income situation changed. I was doing a 10% split, so 5% in the regular account to get the match and 5% in the ROTH option. This option significantly reduced my take-home pay, but ROTHs are very much encouraged by most personal finance experts and I really like the idea of not paying taxes later. However, this year, I’ve been thinking if that’s the best thing for me and my family. Right now, with young kids and lower income, we could use all of the help we can get AND I’m not so sure our income in retirement years will be more than what it is now. So for instance, if we are in a 28% tax bracket now, there’s a chance it will be lower in the future because we just earn less and are in a lower bracket or the government may actually reduce it which ACTUALLY just happened. The only thing is, plain ‘ole economics tells us that tax breaks just aren’t sustainable in the long term, so they WILL increase at some point. The question is will we be a part of the group that pays more. These are all things to consider and probably a lot more depending on your situation as there are so many nuances with both plans that I haven’t delved into.
Ultimately, I’ve decided to go back to the traditional retirement route where we contribute essentially tax free for now AND I decided to contribute the max in 2018, which actually puts me at a 14.5% savings rate which is better than the 10% I was doing with both the ROTH and traditional option. Even with increasing the savings rate, I’m still able to bring home more take home pay which helps our young family right now as we navigate pre-school and extra-curricular expenses. However, I do take some solace in having contributed to a ROTH for a couple of years which ultimately just helps to diversify our portfolio in case we need funds earlier than we can pull from our traditional accounts AND if it just so happens we’re balling out in our retirement age! LOL
What are your thoughts? What would you do? Please share your thoughts below!