Roth IRAs: The Calculation of Consideration

“The only two things you can count on in life are death and taxes,” as Benjamin Franklin eloquently put it. The witty and nearly equally famous retort, “That may be true, but at least death doesn’t get worse every time Congress reconvenes,” was given by an unidentified wag in response.

Let’s begin by stating the obvious, which is that it is difficult to produce and accumulate money when there is a high tax rate. While it is true that everyone should make a fair contribution to the running of the government, even the most patriotic Americans could feel just as proud of their country even if they were to make a far smaller payment. Fortunately, there is one unique tax-reduction instrument that is widely available to all U.S. taxpayers: the Roth IRA and its kissing cousin, the Roth 401(k). Unfortunately, it is generally difficult to avoid the extended reach of the IRS.

The Roth IRA has a strong sales pitch: Contributions to the account are made after taxes, therefore the contributors’ current income tax deduction is not available. However, once the funds are invested, they can be used for nearly any kind of investment activity (within the restrictions set by the account custodian). All income derived from these investments, including interest, dividends, and capital gains, is currently exempt from federal income tax (as well as most state income taxes), both at the taxpayer and IRA levels. Furthermore, payments made from the Roth IRA in the future are also completely exempt from federal (and typically state)…