How to Choose between a Roth and a Traditional IRA

While there are many different retirement savings vehicles out there IRA’s are one of the most common individual retirement savings vehicles outside of an individual’s employer sponsored plan. While there are several options to save for retirement this article will focus on only these two, and will help you decide which a better option is for you!

Step 1: Consider the tax deductibility of the Roth IRA vs. the Traditional IRA. In a Roth IRA the contributions are never tax deductible. The Traditional IRA contributions may be tax deductible depending on your income and your tax filing status. Note: Both IRA’s are eligible for the tax “savers” credit.

Step 2: Consider the age limits for contributions. In a Roth IRA there is no age limit. An individual may contribute at any age. In a traditional IRA an individual is not allowed to contribute in the year they turn 70 ½ or any year thereafter.

Step 3: Consider the income caps. There are no income caps for a traditional IRA. Any individual at any income level can contribute. The Roth IRA has income caps that won’t allow investors to contribute of they have an income over a certain level. This income cap can change yearly.

Step 4: Consider the treatment of investment earnings. Earnings in a Roth IRA grow tax deferred and qualified distributions of the investment and earnings will be tax free. In a Traditional IRA earnings grow tax deferred. Any distributions will be added to taxable income in the year the distribution occurs.

Step 5: Consider the distribution rules. In a Roth IRA a distribution may be taken at any time. A qualified distribution can be taken Tax and penalty free. Non-qualified distributions may be taxed and if taken before age 59 ½ may be subject to an early withdrawal penalty of by 10%. Distributions on a Traditional IRA may be taken at any time. All distributions will be treated as ordinary income, and if taken before age 59 ½ distributions may be subject to an early withdrawal penalty of 10%

Step 6: Consider the required minimum distribution. The owner of the Roth IRA is not subject to any required minimum distributions. A beneficiary of a Roth IRA will be subject to the required minimum distribution rules. A Traditional IRA owner is required to take minimum distribution amounts beginning April 1 of the year following the year they turn age 70 ½. TA beneficiary of a traditional IRA would also be subject to the required minimum distribution rules.

Step 7: Consider these generalities. In most cases if you are in a lower tax bracket when contributing to you IRA a Roth IRA will be better for you. If you are currently in a higher tax bracket and expect to be in a lower tax bracket when you start taking out money a Traditional IRA will usually be the better choice. A lot of times if you are contributing the maximum amount to your IRA the Roth is more likely to be the best choice for you.

Step 8: If you are still unsure contact your investment or tax professional