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Between a Roth and a Hard Place: Going with Roth IRA or Traditional IRA for Retirement

Setting up an individual retirement account (IRA) is a wise move to prepare for retirement. An IRA gives you access to tax benefits for your retirement savings.

There are two types to choose from: a traditional IRA and a Roth IRA. Deciding which one to go with can be tricky, and there are pros and cons for each option.

The basics

The deciding factor that can tilt you towards either a traditional or Roth IRA is your tax rate.

There’s more incentive to select a traditional IRA if you’ll be in a lower tax bracket when you retire. Conversely, a high tax bracket later on in life encourages you to go with a Roth IRA.

It can be challenging to predict how high or low your tax rate will be in the future. You may need to work out the numbers with financial advisors or insurance agents that sell fixed annuities.

The case for traditional IRA

The main draw to this type is that it is tax-deductible right away. Contributions to an IRA account can be offset with the tax you need to pay for a given year. Aside from the relief that it gives you at the end of the year, there a few more benefits when choosing a traditional IRA.

Depending on your income level and overall financial situation, this can potentially enable you to set aside more money for retirement.

Unlike a Roth IRA, The requirements to qualify for the traditional type are less stringent. As long as you’re employed and earning income, you can contribute to a traditional IRA.

Additionally, you can avoid paying a good portion of tax when you’re in your high-earning years. Just make sure you’re still within prescribed income limits to take advantage of significant tax deductions for the year.

The case for Roth IRA

planning for retirementment

On the other hand, a Roth IRA may be the best option for you.

This type is more lenient when it comes to early withdrawals, allowing you to withdraw some of your contributions without incurring penalties. Keep in mind that earnings are not subject to these flexible early withdrawal rules.

The Roth IRA also has no minimum distribution rules. This allows you to keep your savings in the account for as long as you need them to. On the other hand, a traditional IRA requires you to start taking minimum distribution amounts when you reach 72.

Lastly, you could potentially save more with a Roth if you’re not extremely shrewd with disposable income. While the traditional IRA gives you annual tax breaks, it may be tempting to spend the extra money elsewhere.

With a Roth IRA, there’s delayed gratification. You benefit from tax-free withdrawals during retirement. It incentivizes you to set aside money for the future and wait until the tax break kicks in when you retire.

In summary

There are multiple factors to consider when choosing between the two types of IRA.

If you qualify for both, you can invest in a traditional IRA and Roth IRA at the same time. However, the contribution limit is on a per-person basis. For 2019 and 2020, the total amount you can contribute per year for both accounts is $6,000 ($7,000 for persons who are 50 and above).

Weigh the pros and cons well and consult a financial advisor or expert before proceeding.

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