Roth vs. Traditional IRA: Which Is Right For You?

Investing in your future is an essential component to savvy money management. The good news is there are many excellent options for retirement savings. The bad news is that the plethora of investment choices can be very confusing to the average person.

One issue that that many investors have to contemplate is a Roth vs. traditional IRA. How do you know which one to choose for a Roth IRA account? Projecting your future tax rates play a major role in choosing between these two IRAs.

Roth versus Traditional IRA Eligibility Requirements

The first question to ask when choosing a Roth vs. traditional IRA is in regards to eligibility. To qualify for either a Roth IRA or a traditional IRA, you must have earned income that is taxable. This includes wages, salary, tips, bonuses and fees that were incurred for services rendered. It does not include money from passive income like rental property, interest, dividends, or inheritances.

Thus far, the comparison between IRA vs. Roth appears equal. However, that is about to change.

Contribution Differences

There are major differences in the contribution limits between a Roth vs. traditional IRA. You can contribute up to $5,000 or $6,000 depending on age. Contributions can be made annually to either account but combined cannot exceed the limits.

However, the Roth IRA limits for contributions are based on the amount of adjusted gross income you earn. If you generate more than the maximum, expect a phase-out and you are unable to contribute to your retirement account based on Roth IRA rules.

In contrast, an IRA contribution can be made to a traditional IRA, regardless of how much you made during that year. The only stipulation is that you are under age 70 ½.

Consider The Tax Implications

Traditional IRA contributions are also tax deductible up to a certain amount. On the other hand, Roth IRA contributions are not tax deductible. Instead, it offers tax-free as your investments grow and at the distribution phase. When you take your money out of your Roth IRA, you will not pay income tax on your withdrawals.

When you compare Roth vs. traditional IRA, you want to compare your current tax bracket and expected tax bracket at the start of retirement. If you will be in a higher tax bracket at retirement, then a Roth IRA is a better choice. In contrast, someone who will be in a lower tax bracket should probably choose a standard IRA. A Roth IRA calculator or a Roth vs. traditional IRA chart can be used to help you decide the best choice for you.

Distributions During Retirement Years

The requirements for distribution also vary between a Roth vs. traditional IRA. The retirement age for both types of accounts is 59 ½. If you withdraw funds in a traditional IRA before that time, you will be assessed an early withdrawal penalty. However, you can withdraw an IRA contribution from your Roth IRA at any time without penalty. You can also take distributions from your Roth prior to retirement age for educational expenses, to put money down on a first home or pay medical bills.

Distributions are required from a traditional IRA at the age of 70 ½. However, there is no minimum distribution requirement in a Roth IRA. You can leave your funds in the account for your beneficiaries with no tax liability.

There are many differences between a Roth vs. traditional IRA. It is important to weigh all of these differences carefully when making conversions so you can choose the best retirement account for your needs.