Traditional or Roth IRA - What's Your Pick?

Knowing how both the traditional and Roth IRAs (individual retirement accounts) operate, it's probably still tough to tell which one you should choose. After all, traditional IRAs got better in 1997 just as the Roth IRA made its debut. So, here's my synopsis of how you should approach selecting one of these IRAs - though, as always, you should take your unique circumstances into account.

For Many, It's Roth

Growing evidence suggests that the majority of taxpayers may be better off with a Roth. That's because, all things being equal, the earnings in a Roth IRA can be withdrawn tax-free at reitrement, while a traditional IRA's earnings are taxed at withdrawal. And the younger you are, the more years you have to allow your Roth earnings to grow.

Also, unlike with the traditional IRA, the Roth allows you to put off making distributions - and to keep making contributions, for that matter, if you're still working - until after age 70-1/2.

When a Tradtional IRA May Be Best

Though a Roth's potentially tax-free earnings are the reason many will come out ahead with this account, the traditional IRA has several small advantages that can add up for some to a better product. Therefore, you should look into the traditional IRA if -

Your contributions are tax deductible - The Roth IRA doesn't allow for the tax-deductible contributions permitted by the traditional IRA. Though the traditional IRA allows these deductions depending on income (see "Not Your Grandmother's Retirement Account..."), through the years these deductions could add up to a lot more than a Roth's tax-free earnings.

You can't participate in a 401(k) or similar employer plan - If this is you, keep in mind that you can fully deduct any contributions to that traditional IRA.

You could possibly need that money within five years - Some may argue with me on this, but as far as I can tell, the reasons you can get money out of either a traditional or Roth IRA - including for a first-time home purchase or certain education expenses - without paying that onerous 10% penalty tax are pretty darn similar. The only big difference is that you must have held the money you withdraw from a Roth IRA in that account for at least five years. Yes, if you anticipate any withdrawals you should probably avoid IRAs altogether, but just in case...

You plan on using your IRA for a 401(k) plan "rollover" - Should you leave a job with a 401(k) and want to cart that money with you without paying taxes (or penalties) just yet, you need to roll it into a traditional IRA directly or within 60 days. No, you cannot roll it directly into a Roth IRA. Of course, if you're determined to get that 401(k) money into a Roth you can simply open a traditional IRA and transfer that 401(k) money through there and into the Roth. But, consider whether you want to go through the trouble.

Go To Page: 1 2

Articles in this Topic    Discussions in this Topic