By Jim Werner
Deciding whether to contribute to a traditional or Roth IRA? Consider your future living location.
Mark lives in New York City and plans to retire to Texas in four years. He is fortunate to have a pension and Social Security benefit that will cover his essential living expenses during retirement. Mark plans to work part time to cover discretionary expenses, vacations, and increase his savings in retirement.
While working, Mark is also considering a Roth IRA to provide a future source of triple tax-free income (no federal, state, or local tax). Tax-free withdrawals sound great, but it may not be in Mark’s best interest.
Roth contributions use after-tax dollars. Mark is paying federal tax plus an 8% state and local tax to fund the Roth account. If Mark stays in New York, the Roth makes sense since he can then make future withdrawals to avoid the 8% state and local tax. Mark is paying New York an extra 8% tax today in order to enjoy a future tax-free income in Texas.
Consider this alternate scenario: If Mark lived in Texas and was planning to retire in New York, then a Roth would be a great planning option. As a resident Texas taxpayer, he could fund a Roth IRA without any state or local tax. He completely avoids the 8% state and local tax on both sides of the transaction.
A tax-free withdrawal from a Roth account always sounds good, but consider your current and future tax rates before funding a Roth IRA. A Roth may be more favorable for someone moving from a state with a low (or zero) income tax to a state with a higher rate. A retiree moving from a highly taxed state to a state with a lower (or no) income tax rate should run the numbers to see if a Roth IRA is appropriate.
About the author: Jim Werner, CFP®, is vice president of Halliday Financial. Securities-related transactions are managed by Halliday Financial’s subsidiary, Halliday Financial, LLC. Member FINRA and SIPC. The Company only transacts business in states where it is properly registered, or excluded or exempted from registration requirements. Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended and/or purchased by adviser), or product made reference to directly or indirectly in this article, or indirectly via link to any unaffiliated third-party Website, will be profitable or equal to corresponding indicated performance levels. Different types of investment involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. No client or prospective client should assume that any information presented and/or made available in this article serves as the receipt of, or a substitute for, personalized individual advice from the adviser or any other investment professional. Historical performance results for investment indexes and/or categories generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have [the] effect of decreasing historical performance results.