Why wouldn't she use a Roth? Seems like a no-brainer...?

Question

My fiance has a relative that is a CPA who did her taxes. She only only made about $30000 last year. When we get married in 08, we're going to have a combined income over $130,000.

Her CAP told her she could only do $1600 in a traditional IRA. I asked her why not put $4000 into a Roth (for someone in her tax bracket, it seems like a no-brainer, because when we're married, she's going to be in a higher tax bracket).

I never got a straight answer and I didn't want to argue because - he's a CPA and I just dabble in this. Basically, he said the consensus is that the government is going to do something that makes Roth IRAs bad and you should avoid using them.

Has anyone heard of this, or am I missing something incredibly stupid.

Thanks for the feedback folks. This situation really sucks for me because I don't want to argue with her family. Her tax bill is virtually nothing... she's in for a rude awakening when we're married, hah.

This is one of those situations where I just have to "lose". She's only wrapping up $1600, so it's not a big deal to me. She doesn't understand it and I don't want to argue. She's fine with me managing our money, but for now she's still living at home, so I'm going to butt out.

Next family gathering, I'm going to try to play dumb and ask for an explanation. I hate when people get mad when you challenge their advice. That usually is a red flag to me that they don't know what the heck they're talking about. When people challenge me at work, I love it because I get to prove that I know what I'm talking about, hehe.

Thanks again!!

Answer 1

have you considered that's all the funds she had to fund her ira for 2006 that's a reason and a valid one.... also explains why she never gave you a straight answer. blame the tax man !!!
unless he has a crystal ball how would he know what the irs will do in the future regarding roth ira's

Answer 2

It seems unusual to me. There could be 1 of 4 reason for this (or a combination) that I can think of:

1) your CPA thinks that you will be getting married this year AND your income would be over $150,000 (not $130,000). $1600 may be the limit in this case. You may want to clarify this for her CPA. This also seems unlikely.

Please let us know what the CPA says. I am curious myself.

2) the reasoning behind the Roth vs Traditional decision may be because he thinks that down the road (maybe 10, 20, or 30+ years) the government may put a tax on Roth IRAs. With Baby Boomers starting to retire, that would put a huge strain on Social Security. It would not at all surprise me if congress decides to put a tax on retirement accounts to ease the burden. It could happen, but I think it is premature to start planning for such a tax. If this does happen, I would not see why traditional IRAs would be exempt.

3) The CPA may have been trying to eliminate her tax burden for 2006, without thinking down the road. With an income of $30,000, contributing $1,600 to a traditional IRA will lower her federal tax bill by about $200 if she files single. If she files Head of Household, then her taxable income drops by $200, but she would be able to take a tax credit for another savings of $160 (does she have kids?). This would be a small savings now, but she will pay for it when she is ready to live off of her retirement.

4) She may have already made contributions to an IRA in 2006. She does have until April 17 to make additional 2006 contributions. If she made $2,400 in contributions in 2006, she can make another $1,600 for before April 17 and have it count towards 2006. That is good news because she can put away another $4,000 for 2007. But it still doesn't answer the question as to why a Traditional vs a Roth.

This does not sound like her CPA is giving good advice. Unless my reason 2 is coming into play, it does not make sence to me. I would call the CPA back and get an explaination you can understand. It is her retirement at stake, I think the CPA owes it to her to make sure she understands it.

Answer 3

There can be arguments for traditional (deduction now) vs Roth (tax-free withdrawals), but the rest of what she said he said doesn't make a lot of sense, including the limit on what she could put in. Somebody is missing something someplace.

Answer 4

For my major investments I use a investing firm but I also have a Roth. Roth would be great for her because she makes so little and when she does get paid she has already paid the taxes. When and if she were to withdraw it she will not have to pay taxes again. I would say for now since she makes so little go ahead with the Roth. when she starts making more she will want to start another fund to go towards Retirement. I am not sure but I think the most you can put into a Roth per year is $1500.00. Most other investments allow $3000.00

Answer 5

As for the Tax Planning maybe that is what the CPA felt was best. Maybe she needed a deduction this year. As for the rest of his answer, I guess my only response would be:
HUH??????????????????