top of page

Roth IRA or Traditional IRA? That is the Question

When we’re all trying to save more money for retirement, the options can be confusing. For instance, is it better to put money in a Roth IRA or a traditional IRA? The answer is, of course, that any retirement savings plan is better than none at all. However, there are scenarios in which one option is the better than the other. It really depends on your circumstances.

US News says in its recent article “Should You Contribute to a Traditional IRA or a Roth IRA?” that making the right decision includes predicting whether your tax rate will be lower in retirement. If you believe it will be, you might want to invest in a traditional IRA and take a tax deduction now. But if you’re currently in a low tax bracket, you may want to pay taxes now and save funds in a Roth, which you can withdraw tax-free later. If your income is too high, you can’t contribute to a Roth IRA. If you have a retirement plan at work, there are some limits as to how much you can deduct of your regular IRA contributions. Nonetheless, your contribution is limited to $5,500 a year—or $6,500 if you’re over 50.

To contribute to a Roth IRA, your modified adjusted gross income can’t be more than $132,000 in 2016, and if you earn more than $117,000, you can contribute only a reduced amount. This limit applies to single filers, heads of households, or married people filing separately. The cut-offs for a married couple filing jointly are $184,000 for a full contribution and $194,000 for a limited contribution.

Contributions are from after-tax dollars and can be withdrawn tax-free—including earnings—in retirement. You can withdraw the amount you contributed any time without penalty.

You can contribute to a traditional IRA regardless of your income. If neither you nor your spouse is covered by a retirement plan at work, the full contribution is tax-deductible. If only your spouse is covered and you file jointly, you can get a full deduction provided your modified gross income is less than $184,000. There’s a lesser deduction with an income up to $194,000. If you’re covered by a retirement plan at work, you can get a full deduction only if your modified gross income is $61,000 or less (single) or $98,000 (married filing jointly). You can get partial deductions if your income is up to $71,000 (single) and $118,000 (married filing jointly). Withdrawals are taxed when you extract the money. If you take anything out prior to reaching age 59½, you’ll pay a 10% penalty.

The right decision each year is going to depend on your age, the amount of retirement savings you have already, your current tax bracket, and your financial expectations in retirement. This decision may also be an element of your estate planning because you are required to start withdrawing from a regular IRA at age 70½ but are never required to take any money out of a Roth. Plus, you can continue contributing to a Roth after age 70½, provided you have earned income.

A Roth IRA or 401(k) is a wise choice for young people just beginning in the workforce. Their lower salaries mean they wouldn’t get much of a tax deduction from a traditional IRA. These folks are great candidates for a Roth, which will compound forever! And unlike a traditional IRA, if you need the money at any time, you can withdraw the contributions you’ve made without penalty. With this in mind, here are four factors to consider when deciding to invest your retirement funds in a Roth IRA or traditional IRA:

  1. How does your income now look compared to what you expect in retirement? If your income is low now, a Roth might be a good choice, especially if you expect to earn more later. If you earn too much for a Roth, a traditional IRA is your only choice.

  2. What retirement savings do you have already? A diversity of investments in your portfolio makes it easier to minimize taxes and extend your savings. Analyze whether a Roth or traditional IRA will be better to add to your retirement portfolio.

  3. How close are you to retirement? The closer you are, the better picture you’ll have of your future and whether you’ll need tax-free withdrawals.

  4. Do you expect your money to outlive you? Once you reach age 70½, you have to make withdrawals from a traditional IRA and pay taxes on them. This does not hold true for a Roth IRA. If you don’t need those withdrawals, you’re better off choosing a Roth. If you expect you’ll need them, and you have a higher income now, you may be better with a regular IRA.

1 view0 comments


bottom of page