July 9, 2014
Mistake #6: Leaving Your Cow in the Wrong Stall
One day, Farmer Brown was summoned by the big city courthouse for jury duty. Rarely did Farmer Brown ever go to the “big city” and never had he actually driven the confusing one-way streets of downtown where the courthouse was located. Farmer Brown would have to navigate the highways and byways of the big city and worst of all, find a place to park.
After several hours of driving, Farmer Brown finally arrives downtown. Upon locating the courthouse for jury duty, Farmer Brown began the daunting task of finding a place to park his beat-up truck. Upon turning off the busy one-way street and into one of the many parking garages, much to his amazement, at this particular garage, no one was available to take his money.
Instead, located at the main entrance was a small box with a green button attached to a stand with a bright green button, which Farmer Brown proceeded to push.
After pulling his parking ticket from the box, Farmer Brown proceeds into the parking garage to find a place to park.
“Free parking,” thought Farmer Brown. “What a wonderful surprise!”
After eight hours of jury duty, Farmer Brown decides to do some shopping for Mrs. Brown. “What the heck,” he thought, “especially since parking in the garage is free!”
It was nearly 9:00 p.m. when Farmer Brown located his truck in the parking garage. Slowly making his way toward the exit, he notices a man in a booth with a gate blocking the exit. As Farmer Brown pulls his truck to the booth, the man in the booth abruptly holds out his hand and eyes Farmer Brown.
“Whatcha need, Tiger?” asks Farmer Brown.
“I need your ticket,” responds the attendant.
“What ticket?” exclaims the perplexed farmer.
“The one you got from the little box when you drove into the garage,” a now somewhat agitated attendant responds.
Farmer Brown hands the ticket to the attendant.
“That’ll be twenty-four dollars,” says the attendant.
“Twenty-four dollars!” responds a surprised Farmer Brown.
“Sorry,” quips the attendant, “the longer you stay, the more you pay.”
What I just described to you is a “Traditional” IRA (or any other “pre-tax” retirement account). Basically, the Traditional IRA leads you to “believe” that your stay in the parking garage is free (the government doesn’t ask for their taxes up front – that’s why they call your contributions “pre-tax”). And don’t expect the man in the booth to accept anything less than his fair share.
Certainly, you can stay in the parking garage as long as you want. Unfortunately, the longer you stay (leave your money in the pre-tax account), the worse it gets.
The next day, Farmer Brown returns to the big city for his second round of jury duty. Frustrated over the rate charged by yesterday’s parking attendant, Farmer Brown pulls his pickup truck into a different parking garage hoping to negotiate a different fee with the attendant. As Farmer Brown rounds the corner of the entrance, he quickly notices that this parking garage is different. It has a booth with an attendant located at the entrance. As the farmer approaches, the man in the booth sticks his hand out. Confused by this new arrangement, the farmer stops his truck to find out more.
“Whatcha need, Tiger?” asks Farmer Brown.
“Twenty-four dollars,” quips the attendant.
“Twenty-four dollars!” responds a slightly shocked Farmer Brown. “The last garage didn’t charge me ‘till I left the garage.”
“Oh,” says the attendant. “You must have parked in the ‘pre-tax’ garage. This is the ‘after-tax’ garage,” says the attendant matter-of-factly.
“Why would I want to pay twenty-four dollars now?” the farmer asks.
“If you pay me up front, you won’t have to pay me later. In fact, I’ll let you park in here for as long as you want!” states the attendant.
“You mean to tell me that if I park here for 20 days, the rate is still only twenty-four bucks?” a surprised farmer asks.
“You got it,” the attendant says.
The second parking garage Farmer Brown parked in describes the Roth IRA. Unlike the “pre-tax” Traditional IRA, the Roth IRA allows you to save money that has already been taxed—called “after-tax” money. The benefit to you is that by paying the toll up front, from that point forward, all of the earnings and income will be tax-free forever!
So for everyone who is eligible, the Roth IRA is something you should most definitely consider. And, take it from someone who is in the retirement-planning field: knowing that the taxes are no longer an issue when you take money out of the Roth (exit the garage without having to pay the toll) makes planning for retirement a heck of a lot easier.
Be sure to talk to your financial advisor about your retirement options and if you’re eligible for a Roth IRA. You’ll be glad you did… and will most likely worry less about your retirement as a result.