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.