Which to Choose: Traditional IRA or Roth IRA?
You can select between two basic types of individual retirement accounts (IRA) to help you save for retirement. These are Roth and Traditional IRAs. Both of these plans should encourage you to save more money for your retirement because of current or future tax advantages. The best choice really depends upon your future plans, expectations and current situation.
Most people carefully analyze the growth potential and tax advantages of each type of plan before making a decision. Because the future is uncertain, some people might also weigh the risks of committing to a traditional IRA instead of a Roth IRA. Once you learn more about these savings products, you can make the best decision for yourself. In general, you might conclude that the right decision will be to commit to making regular contributions to your retirement savings in the first place.
Why Choose a Traditional IRA?
Do you expect your retirement tax rate to be lower than it is during your working life?
Will an additional tax deduction assist you financially today and even help you save more money for retirement?
Can you commit to keeping your account intact until you qualify for withdrawals?
A Traditional IRA allows you to enjoy a tax deduction this year and tax-deferred growth. Lower taxes might enable you to reduce debt and make larger contributions to your savings plan. Larger contributions will enable you to enjoy greater savings because you are depositing more money and the return rate will be based upon a larger balance.
Understand that you will have to “pay the piper” eventually. Because you deferred taxes, you will have to pay them when you make withdrawals. The benefit is mostly for people who will be taxed at a lower rate because they have a lower income during retirement than they have now.
Why Choose a Roth IRA?
You cannot deduct Roth IRA deductions in the current year, but you can enjoy the benefits of tax-free growth.
When you retire and start taking qualified distributions, it is not a taxed event.
If you assume that your taxes will be just as high in the future as they are now, this plan has advantages. It is also attractive for people who would rather just get their taxes out of the way so they do not have to worry about them while enjoying their retirement. Some people will only be able to take the standard deduction in any case. A Roth IRA might be better because they will not get to enjoy the advantages of tax-deferred contributions anyway.
Should You Consider a Roth or Traditional IRA?
Early withdrawal penalties and taxes might occur in either plan. There are some exceptions, but you should only take money out early as a well-considered last resort. Both types of plans require a commitment.
Moderate income families who can really use the current tax deduction might be better off with a traditional IRA. Others might consider the freedom of a Roth IRA.