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Is It Better to Contribute to a Traditional or Roth IRA?

When trying to save for retirement, you must make the decision between a Roth and traditional IRA. For the majority of middle-income taxpayers, traditional IRAs are an easy way to receive tax-deferred growth and a tax deduction. On the other hand, Roth IRAs use after-tax dollars and have tax-free growth and distributions during retirement. IRAs allow you to put $5,500 into a retirement account. It is there that the money accumulates tax-deferred. If you are older than fifty, you can start to contribute an extra $1,000 each year. You always want to maximize the amount of retirement savings you can accumulate and to do this the choice must be made between a Roth and traditional IRA. Making the right decision means you must be informed on both types of accounts.

Tax Issues Involved In the Decision

You must determine if you qualify for traditional IRA tax deductions. If you do qualify, the tax deduction reduces your taxable income during the applicable tax year. If your income is low and you want to reduce your taxable income as much as possible, a traditional IRA is the best account for you. This type of account is ideal for increasing your cash flow currently through deductions. Adversely, if you do not feel you need the deduction and you meet the Roth IRA requirements, it will be beneficial to choose the Roth account since you'll be able to obtain tax-free distributions during retirement.

Consider Your Tax Bracket

You must take into consideration whether you'll be in a lower or higher tax bracket in the future. You may think that once you hit retirement, your tax bracket is reduced. However, this is not always the case. Mike Saghy, senior vice president at FNB Wealth Management of Pittsburgh, stated that no financial advisor expects their clients' income taxes to be lowered in the future as far as the rate goes. In fact, it is often the opposite. If you believe you'll be in a higher tax bracket during retirement, then it is advisable to put contributions into a Roth instead of a traditional IRA. On the other hand, if you believe you'll be in a lower income tax bracket upon retirement it is advantageous to place money into a traditional IRA.

Think About Your Retirement Goals and Savings

You must also take into consideration how much money you currently have in a retirement savings account, what types of savings accounts you have and the amount you believe you'll be able to save. If you currently have a traditional IRA and have a working retirement plan, then that income source will be taxed at an ordinary rate during your retirement. This will leave you with a lower amount of revenue from the distributions of the plan. On the other hand, if you have not saved a substantial amount for retirement then taking on a traditional IRA is better than not contributing any money to your retirement at all. If you can make it without a deduction, putting money into a Roth makes much more sense, as your contributions will be worth much more if they are tax-free.

If You Want To Leave Money to Loved Ones

If you have a nest egg that you hope to leave to heirs, it is best to put money into a Roth IRA instead of a traditional one. This is because Roth IRAs are a much better estate-planning tool, as beneficiaries can spread the payments out over the length of their lifetime. The benefit of this is that the inherited funds can grow over time.