IRA-vs-ROTH-IRA So instead of wasting your time trying to convince you how great they are, I would rather discuss the mechanics of how you take advantage of them.

Devise a savings strategy and start the automatic saving.

IRAs come in two flavors: Traditional and Roth.  Traditional IRAs are tax-deferred, i.e., money grows year-after-year without Uncle Sam collecting taxes on it.  You put the money in, sometimes getting a tax-deduction up front, and instead of recording dividends and capital gains to the IRS each year, you just let the IRS know how smart you are by reporting the contribution.  The IRS is only interested your distribution, which the tax-deferred portion will be reported as ordinary income. Roth IRAs, on the other hand, have you pay taxes on the money up front, similar to a paycheck, and then let the money grow tax-free.  This works especially well for people like me: young and trying to get in a higher tax bracket. I am prepaying taxes at a lower rate now.  That way when I am sitting on millions and having to withdrawal, I wouldn’t have to pay 39.6% on it. It can work well in a variety of other situations too.  Someone from Mackey Advisors would love to help you decide which one works best for your situation.

Once you know which account type works best for you, money needs to be contributed.  The most common scenario is people making a lump sum contribution coming tax time.  It can make sense in a lot of scenarios.  However, it can be so hard to hit the contribute button when it is tax time and you see all the money you can’t touch until retirement.  So an alternative is to make sure you are eligible for the contribution early enough in the year and make regular (monthly, quarterly, etc.) contributions.  Nearly every IRA allows automatic contributions.

Now what?

This is often where people get confused as to what they should do next.  The idea of a tax-advantaged account is to have the money grow without Uncle Sam collecting year-in and year-out.  So how do you make the money grow? The key here is to understand the difference between saving and investing.  Saving is setting the money aside; investing is putting the money into your portfolio of investments.  The investing step can be the largest hurdle in the process.  Your portfolio is not a 401(k), IRA, and Roth IRA.  Those are account types.  Your portfolio is the set of investments you own within all of those accounts.  The portfolio should be allocated so that investments that may be subject to more taxation are held in the IRAs, so as to get the most tax-advantaged bang for your buck, while more tax-efficient investments are held in accounts which are subject to tax year-over-year.  This is where individual attention is required.  Whether you invest on your own or worth with an advisor, the specific investments in your portfolio should be thoroughly researched.   Also, what portfolio works for you does not work well for everyone else.  So work with Mackey Advisors to determine the proper asset allocation, diversification, and rebalancing strategy.

So the crux of this is…

Kind of like the rotisserie chicken commercials: set it and forget it! Generate a savings strategy, invest in your portfolio, and automate both steps.