A client this week asked about a Roth versus a Traditional IRA. When I gave my answer he said, “You must write that in your next column.” My answer begins with this fable.
Farmer John looked at his freshly plowed field on a beautiful spring day. It was planting day and he could already taste the delicious corn that would one day be buttered on his plate. As he hefted his bag of seeds, a man in a black suit approached. Farmer John knew this man very well. He had seen him often and knew what he wanted.
Farmer Jane stood at the edge of her field as well. She was John’s neighbor and she too stood ready to plant her bag of seeds. Jane glanced over at John and noticed that familiar man in the black suit talking with him. Jane knew he would be visiting her next, same as he did every year. That man, was the taxman.
As always, the taxman had come to collect the tax, and the rate was 20%. Each year he made John the same offer. He could either pay the tax immediately, by giving taxman 20% of his corn seed, or he could wait until the end of the harvest season and pay 20% of the crop instead. The decision was John’s to make. Should he pay tax on the seed or on the crop? Soon Farmer Jane would be offered the same deal.
As it turned out Farmer John agreed to give taxman 20% of his seed and have his taxes over with. Farmer Jane, not wanting to give taxman any of her precious seed, decided on the second option. She would defer the tax and pay it on the crop at the end of her harvest. The question is, which farmer made the best decision?
John went ahead and planted his field. His seed didn’t go as far since he had given 20% of it to the taxman, but he was satisfied he had made the right decision, knowing that the large bounteous harvest would all be his.
Jane planted her field that day as well, filling up 20% more rows than John since she had the full bag of seed at her disposal. She was confident the harvest at the end of the year from her full bag of seed would more than make up for the tax she would then have to pay.
The two worked hard all season and since they were neighbors with identical soil and weather, their crops grew exactly the same. When harvest time came, John and Jane gathered up their beautiful corn and stacked it in their barns. Jane’s harvest was clearly more since she had planted more seeds. As they admired their beautiful crop, taxman arrived with his large truck and proceeded to load up 20% of Jane’s crop. As he waved goodbye, the two turned again to look at their storehouses of corn. The question is – who had made the best decision? (Answer Next Week)
Hi, I'm Dan. I'm a CFP® Professional.
Securities and advisory services offered through Commonwealth Financial Network®.
Member www.finra.org / www.sipc.org , a Registered Investment Advisor. Wyson Financial, 375 E Riverside Dr, St. George, UT 84790
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