Choosing an IRA
Which is the better choice, a Traditional IRA or a Roth IRA?
When looking to save for retirement, you may wonder which type of individual retirement account (IRA)—Traditional or Roth—is the better choice. The answer will depend on your age, income and tax bracket. Then compare the rules and tax benefits to help choose the account that is right for you.
As long as you have earned income, you can contribute to either. You must be under age 70 ½ to contribute to a Traditional IRA, but you can contribute to a Roth IRA at any age.
The amount of income you earn dictates how much you can contribute to a Roth IRA—or whether you even can. (Check with your tax or financial advisor to determine the amount you may contribute to a Roth.) Traditional IRAs have no income restrictions. The maximum amount that you can contribute is the same for both types of accounts. For 2016 that amount is $5,500 if you’re under the age of 50 and up to $6,500 if you’re age 50 or older.
The biggest difference between Traditional and Roth IRAs is when you receive a tax benefit. Both types of accounts allow you to defer taxes while your money is in the account. You may be able to claim a tax deduction for your contributions to a Traditional IRA for the year that you make them. Roth IRA contributions are never tax deductible.
However, once you are retired, withdrawals from a Traditional IRA are generally treated as ordinary income and are subject to income taxes. Qualified Roth IRA distributions in retirement are tax-free. This benefit of Roth IRAs can save you thousands of dollars over the course of your retirement.
Another major difference between Traditional and Roth IRAs is something known as “required minimum distributions” or RMDs. Traditional IRAs require you to take RMDs from your account beginning at age 70 ½. Roth IRAs have no RMD requirements. This means that you will never have to take any money out of your Roth IRA if you do not want or need to and can potentially leave more to your heirs.
For some people, the ability to claim a tax deduction in the current year pushes them toward choosing a Traditional IRA. For others, the ability to withdraw money from a Roth IRA in retirement tax-free—and the flexibility to decide whether to take a withdrawal at all—is the main deciding factor. Because there are so many rules, it is a good idea to consult with your tax and financial professionals before making the final choice.
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