Choose one: Pay taxes now or Pay taxes later

Entire professions have been created around the issue of deferring taxes. The 1997 Taxpayer's Relief Act, however, has a tucked away jewel that requires the taxpayer to pay now, but benefit later. It is called the Roth IRA (individual retirement account).

The Roth IRA is the latest government answer to improving retirement financial security. Everyone except the "Too Well Off" class ($95,000 single income, $150,000 joint income) of earners get to play in the "to Roth or not to Roth" debate.

The Roth works like this: taxpayers can make only non-deductible contributions, must pay the taxes now, and do not receive any special tax rate discount. The trade-off is that all earnings and growth accumulate free of any federal income tax. The regular IRA allows individuals to make a tax-free contribution now, but they must pay federal taxes at withdrawal time. The Roth allows an individual that has maintained the account for five years and is at least 59 and one-half years of age, to withdraw tax-free.

Is the Roth for you? To be sure, check with your accounting or financial planning professional. Ask them to model and compare the anticipated returns from both IRA options. Generally, however the Roth is a good option the further you are away from retirement and especially so if you are expecting to be in a high tax bracket during retirement. For owners of businesses who elect to roll their 401(k) into a Roth, the allure of avoiding potentially huge tax consequences at cash out time may be particularly attractive. The Roth is also a bullseye for anyone that cannot make a tax-deferred contribution to a regular IRA.

By Michael Martin, CPA with Belew Averitt LLP