Stay Ahead of Law Changes & Protect Yourself Against Being Audited: Corporate Transparency Act and Reasonable Compensation

To Roth or Not to Roth, That is the Question

IRA stands for Individual Retirement Account. There are two primary types, Traditional IRA and Roth IRA. In this post I’m going to give you the basic information you need to help determine which type is best for you to contribute to annually.

Employee Retirement Income Security Act

In 1974 the Employee Retirement Income Security Act was signed into law and Traditional IRAs became available for the first time. These retirement accounts allow most taxpayers to make contributions to an account in their control and invested at their discretion. The money is contributed, in most cases, pre-tax, which allows a tax deduction to be taken on their tax return for that year. The money in the account then fluctuates based on the ebb and flow of the market and how it’s invested, with gains and losses occurring over time. These gains and losses are not realized on the tax return, but instead happen behind a tax-deferred barrier. This means the money can grow without being taxed right away.

The Taxpayer Relief Act of 1997:

The Taxpayer Relief Act of 1997 introduced a new type of IRA, the Roth IRA. These operate somewhat similarly to Traditional IRAs, but with different rules. Most importantly is that your contributions are made post-tax rather than pre-tax, which means you do not deduct your contributions to the account on your tax return. You get NO upfront benefit from making contributions to the Roth IRA. The real benefit comes from the back end, when the account has been open for at least five years and you’ve reached age 59 ½. Upon taking distributions from the account then, the distributions are tax free. This means if you put $5,000 into the Roth IRA at age 50 and never put another dime in, then 10 years later fully distribute the account which is valued at, say, $6,000, you wouldn’t recognize any of the gain as income and would receive the full distribution tax-free. Obviously as the numbers scale up Roth IRAs just look better and better.

Ultimately you must decide if you want up front tax savings or wait for your savings on the back end. The Roth IRA has the greatest potential for overall savings as your account has unlimited potential growth. This makes it the IRA of choice for many people. However, there are two additional points you should consider before closing the book on this, and those are the compounding nature of tax savings and the concept of “principal investing power”.

Money is a finite resource, you only have so much of it. In the scenario in which you’re considering contributing $2,000 to an IRA, but you don’t yet know which one you want to contribute to, you can actually afford to contribute more to the Traditional IRA. By contributing $2,000 to a Traditional IRA, in a 22% tax bracket, you save $440 in taxes. This means that you could contribute $2,500 to the Traditional IRA, which would save you $550 in taxes, and then put that $550 in your bank account and it’s as if you were only out $1,950. When you contribute $2,000 to a Roth IRA your bank account is just out the $2,000.

Now regarding “principal investing power” I’ll use an example. If you invest $100,000 and I invest $10,000 and we both get a 5% rate of return on our investments, who earns more? You do, of course. The more you invest the more you earn, compounded enough times this becomes hugely relevant. Now apply that to our previous learning about compounded tax savings. The Traditional IRA holder contributed $2,500 and only lost $1,950 from their bank account while the Roth IRA holder contributed $2,000 and lost that $2,000 from their bank account.

The point here is that the Roth IRA has some huge advantages, but the Traditional IRA isn’t something to be dismissed either. Generally speaking, the younger you are the more attractive Roth IRAs should be to you. I generally prefer Roth IRAs over Traditional IRAs, but both have their place in the financial world.

The final consideration is whether you’re eligible to contribute to the IRA of your choice. Roth IRAs have an income limit of about $120,000 or single filers, $189,000 if you’re married. If your income is above that threshold your contribution may be limited or prohibited entirely. For Traditional IRAs it depends whether you have an employer sponsored retirement plan or not. If you do not, there is no income limitation for Traditional IRA contributions. You should consult with your tax advisor before making any contributions to a retirement account.

If you don’t have a tax advisor you should contact us at Molen & Associates. These types of conversations will occur naturally when discussing your finances each year with your advisor. If you have any additionally questions regarding this or any other subject please let us know by calling us at (281) 440-6279 or by email to info@molentax.com. We’re happy to give you a free 15-minute consultation to help you get your taxes and finances back on track.

Keep an eye out for our upcoming “Backdoor Roth IRA Strategy” follow up post, which will give you more insight into how you can contribute to a Roth IRA even if you exceed the income limitations.

The Molen & Associates Difference

Mike Forsyth

“Super helpful and timely. This is our first year with them and we look forward to trusting them with our taxes and business books for years to come.”

Caitlin Daulong

“Molen & Associates is amazing! They run an incredibly streamlined process, which makes filing taxes a breeze. So impressed with their attention to detail, organization, and swift execution every year. Cannot recommend them enough!”

Sy Sahrai

“I’ve been with Mr. Molen’s company for few years and I felt treated like family respect and dignity. They are caring, professional and honest, which hard to find these days. Love working with them.”

Divorce and Taxes: Filing Status, Alimony, and Dependents

Divorce and Taxes: Filing Status, Alimony, and Dependents Divorce brings significant emotional and financial changes, and one area that’s often overlooked is how it impacts your taxes. From determining your filing status to understanding alimony rules and claiming...

Breaking Down the One Big Beautiful Bill (OBBB): What the 2025 Tax Reform Means for You

On July 1, 2025, the U.S. Senate passed one of the most significant tax reform bills in recent history: the One Big Beautiful Bill (OBBB). With the House expected to approve the final version shortly and a presidential signature likely to follow, this sweeping...

Major life changes and taxes

How Major Life Changes Affect Your Taxes (Hint: You’re Going to Like It) Major life changes and taxes—like getting married, moving, or having a baby—are exciting milestones that often come with significant financial adjustments. But here’s some good news: these events...

What happens if you don’t file on time

Got IRS Penalties? Know the Rules, Pay Nothing If you’ve received a penalty notice from the IRS, don’t rush to pay it. There are ways to reduce or even eliminate IRS penalties if you know how to approach the situation. Whether you’re facing late filing, late payment,...

Want to deduct your dog? Here’s how?

Three Ways to Deduct Your Dog, Cat, or Other Animal Expenses Owning a pet is often an expensive yet rewarding experience, with annual costs for dogs ranging from $1,270 to $2,800. While the love and companionship pets provide are invaluable, the IRS views their...

Claim $1600 Stimulus Check – IRS 2025 Rebate & Eligibility

As millions of Americans continue to grapple with financial challenges post-pandemic, questions surrounding the $1600 stimulus check, IRS 2025 payments, and the Recovery Rebate Credit are trending once again. Whether you missed out on a past stimulus payment or are...

Bookkeeper vs. Accountant: What’s the Difference?

Bookkeeper vs. Accountant: What's the Difference? Managing your business’s finances is essential for long-term success, but understanding the roles of a bookkeeper and an accountant can be confusing. In the debate of Bookkeeper vs. Accountant: What's the Difference?,...

How to Set Up Your IRS Online Account with ID.me

ID.me and the IRS Login System ID.me is a third-party identity verification service that the IRS uses to provide secure access to certain online tools and services. If you need to access your IRS account online, such as to view your tax records, get your transcripts,...

What Is the One Big Beautiful Bill Act? Key Tax Changes for 2025 and Beyond

Big Beautiful Bill Act Changes Your Taxes If you’re a taxpayer, business owner, or financial advisor, the “One Big Beautiful Bill Act” (OBBB) could impact your tax strategy in major ways. Passed by the House of Representatives in May 2025, this sweeping tax reform...

5 Signs Your Business Needs Accounting Help

5 Signs Your Business Needs Accounting Help Running a successful business requires more than a great product or service—you need a solid handle on your finances. However, many small business owners and self-employed professionals find themselves overwhelmed by the...

Request an Appointment Today

6 + 4 =

Call us at

Share This