It’s not very often you hear someone touting the benefits of a Traditional IRA over a Roth IRA, but today it happened. Roland Manarin, founder of Omaha, Nebraska based investment firm Manarin Investment Counsel, says that the bigger pot you work with in a tax-deferred account will result in greater earnings than a tax-free account.
“To put $4,000 into a Roth, you have to effectively earn $6,000,” because of taxes, Manarin said. “To put $4,000 into a regular [deductible] IRA, your take-home pay goes down by $3,000. What a huge difference,” he said. “Let’s turn it around: You put $4,000 in a Roth, that’s the equivalent of putting $6,000 in a regular IRA. There’s just no comparison.”
Then, “you compound that difference over 20, 30 years. Now I’m facing retirement, I’m going to be in a lower tax bracket, I’ve got three times the money in my regular IRA versus the person in the Roth,” Manarin said.
While I applaud the “going against the grain” idea, because it spurs thinking, I think this guy has a few flaws in his reasoning.
Assuming a lower tax bracket in retirement may be dangerous. Who knows what taxes will be in the future, that’s why I personally advocate tax diversification (a mix of tax-free and tax-deferred retirement accounts) so that you can hedge a little.
Assuming everyone can invest tax-deferred in a Traditional IRA is even worse. You can only deduct your contributions to a Traditional IRA if you satisfy certain rules, one of which is whether you’re an “active participant” in another in a company sponsored retirement plan. For example, if you’re single, participate in a company 401(k) and earn more than $50,000, you cannot deduct your Traditional IRA contributions! (more rules here) That throws the whole idea of deductible IRAs being better out the window.
It’s an admirable try at it and a great way to get yourself and your firm in the papers but I think it’s deeply flawed.