How to Choose Between a Roth vs. Traditional IRA

How to Choose Between a Roth vs. Traditional IRA

1000 667 Jennifer Nelson

Tomato, tomahto? Potato, potahto? Some differences don’t matter. Others do. Here’s how to keep Roth and traditional IRAs straight when you’re planning your retirement.

What Is a Roth vs. Traditional IRA?

An Individual Retirement Account — or IRA — is a tax-advantaged account, separate from your 401(k) or pension, that helps you save for life after you’ve left the workforce. So why are there two separate kinds? The major difference comes down to timing.

With a traditional IRA, your contributions are tax deductible in the year you make them; you pay the taxes when you withdraw. A Roth IRA, in comparison, taxes you now and not later. For either type of account, you can contribute up to $6,000 each year (plus an extra $1,000 if you’re over 50).

Which One Is Right for You?

Answering that question requires you to predict what your tax rate will look like in the future.

If you expect your tax rate to be higher in retirement than it is now, based on your income in decades to come, go for the Roth IRA and take advantage of tax-free withdrawals at retirement.

If you suspect your tax rate is higher now than it will be when you retire, choose the traditional IRA and enjoy the upfront tax advantage.

What Else Should You Know?

Crystal ball not giving a clear reading? Here are three factors you can weigh to decide between a Roth vs. traditional IRA.

1. Early Withdrawal Penalties

  • Traditional IRA: 10% early withdrawal penalty on top of taxes at your current rate
  • Roth IRA: No early withdrawal penalties or taxes

2. Restrictions

  • Traditional IRA: Requires minimum distributions to be taken at age 70 ½
  • Roth IRA: No rules about when you need to start withdrawing

3. Ability to Continue Saving

  • Traditional IRA: No contributions past age 70 ½
  • Roth IRA: You can continue contributing as long as you qualify

There’s no obvious choice between the two. The traditional IRA provides a tax break in real time, which can be a powerful incentive. If you’d rather wait for the tax break and get access to additional benefits, the Roth IRA may be the account for you. Figure out what you want to get out of your IRA and how you plan to do it, and you won’t be far from finding the right choice.

Jennifer Nelson

Jennifer Nelson is an award winning health, health IT, and personal finance writer.

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