Are you asking these questions? You’re not alone – many struggle with the question: Which type of IRA – Roth or Traditional – is right for me? This uncertainty can cause “Deer in the Headlights Syndrome.” Too unsure to decide, not wanting to make a mistake, and the fear of making the wrong decision stops us dead in our tracks.
Whenever uncertainty arises in conjunction with a need for a decision, what do most people do? Nothing.
Well don’t do nothing, and the first step is to arm yourself with knowledge.
When determining what type of IRA is most appropriate for you, there are several important features of each IRA type that you’ll want to understand before you make any decisions. The chart below goes over some (but not all) of those features:
| Traditional IRA | Roth IRA | |
| Contributions | Pre-Tax | Post-Tax |
| Deductible | Yes – click here to review limitations based on earnings and participating in a qualified plan | No |
| Contribution Limit | Age 49 & Below: $5,500; Age 50 & Over: $6,500 | Age 49 & Below: $5,500; Age 50 & Over: $6,500 |
| Withdrawals | Taxed | Tax-Free |
| Distribution Can Begin | Age 59 ½ | Principle: Any Time; Earnings: Age 59 ½ |
| Required Minimum Distribution | Age 70 ½ | None (unless inherited) |
The most common factors that help people decide between the two types of IRA are: taxation and deductibility. When do you want to pay taxes? Do you want deductions on this year’s earnings? The answers to the two previous questions are not the only thing you must consider, but they can help steer you in the right direction.
A traditional IRA makes sense if:
- You expect a lower income tax rate when you’re retired – this would make sense for most people who are currently in their peak earning years, and
- You want a deduction on your current income.
A Roth IRA makes sense if:
- You anticipate a higher income tax rate when you’re retired – this would make sense for younger people who aren’t yet at their peak earning years.
- You are looking for flexibility, the ability to access your contributions penalty-free before age 59-1/2 (i.e. rainy day fund).
Still not sure which IRA type is the best fit? Then consider splitting your contributions between these two types of IRAs. By contributing money both on a pre-tax and post-tax basis, you will have tax diversification in retirement. Whatever you do, don’t let these rules discourage you from making a contribution to an IRA. You’re better off saving money for your future, than just spending it all today.
So do something to take control of your retirement and tax savings.
To learn more about IRAs, click here.
Distributions from Traditional IRAs are taxed as ordinary income and, if taken prior to reaching age 59 1/2, may be subject to an additional 10% federal income tax penalty.
To Qualify for the federal tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least five years, and the distribution must take place after age 59 1/2 or due to death, disability, or a qualified special purpose distribution, which is a qualified first-time home purchase (up to a $10,000 lifetime maximum). Depending upon state law, Roth IRA distributions may be subject to state taxes.
The companies of National Life Group and their representatives do not offer tax or legal advice. For advice concerning your own situation, please consult with your appropriate professional advisor.
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