Roth IRA vs. Traditional IRA. What Is Best For You?

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Roth IRA vs. Traditional IRA. What Is Best For You?

Retirement Author: Admin


When planning which IRA to contribute to there are several things that you need to consider as depending on your circumstances the benefits of each can vary. Below are some highlights of the differences between the two that may impact your decision-making.

Tax Deductibility

One benefit of a traditional IRA is that your contributions are tax-deductible for the year in which you make them; this is not the case for a Roth IRA. However, in the future when you draw funds from your traditional IRA you will pay taxes on them, for a Roth IRA you do not pay taxes on your future withdrawals.

Both forms of IRA do not tax you on the income that grows on the funds while you leave them.

Essentially what one needs to ask is when they want to face the tax burden of this income. If your tax rate now is higher than you expect it to be in the future, then a traditional IRA is the most tax-effective investment and vice versa for a Roth IRA.

Contributions Limits

Contribution limits for a Roth IRA and a traditional IRA are the same, $5,000 a year plus a $1,000 catch-up contribution if you’re 50 years old by the end of that year. You have to note, however, that that contribution limit is shared so you have to split the amount across both a traditional IRA and a Roth IRA if you have both.

When Can You Withdraw Funds?

For a traditional IRA, you will face penalties if you withdraw funds while you are under the age of 59.5. An advantage of the Roth IRA is that there is some added flexibility to withdrawing funds if certain criteria are met. First, you must have had the IRA for more than 5 years. Second, if the first criteria are met and you:

  1. have reached the age of 59.5,
  2. are disabled,
  3. the payment is made to a beneficiary on your death, or
  4. The amount is used to purchase your first home (up to $10,000), the funds can be withdrawn early.

Required Minimum Distributions

With a traditional IRA, you are required to be taking minimum distributions out of the fund after you turn 70.5, while with a Roth IRA this is not required. This can be important to some individuals as they may not wish to be forced to immediately withdraw funds and pay tax on them.

Contribution Limits

Roth IRAs have income limits that can result in you not being able to make a contribution in a given year (or ever), additionally, your contribution limit can be limited for certain income thresholds. Alternatively, traditional IRAs do not provide any income limits so you will always be able to contribute to your IRA.

In addition to income-based contribution limits, there are also age considerations. For a traditional IRA, you are not allowed to contribute to it after you turn 70.5, the same time in which you must begin taking out the stipulated minimum distributions. Roth IRAs do not have any age-based contribution limits so you can continue to contribute to your Roth IRA at any age.

So what is best for you?

Assuming you fall within the income level where you can contribute to either form of IRA you need to consider which option is best for your personal circumstances. Taking the immediate tax deduction of a traditional IRA is a major consideration for many retirement investors. However, for some the fact that there are fewer constraints on a Roth IRA, around age limits and withdrawal penalties, makes it a more attractive option. Ultimately you need to assess which is more important to you.