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Roth or Traditional IRA: Which one should you go for?

Roth or Traditional IRA: Which one should you go for?

If you’re one of the many approaching retirement, you will need a source of money that will sustain you for 20 years where you will not be actively working. Individual Retirement Accounts (IRA in short) form a great option in this regard.

That being said, IRAs bring forth the dilemma of having to choose between two types – a conventional IRA and a Roth IRA. Both have their owns sets of advantages and disadvantages. While the Roth IRA is a better choice for those who anticipate the tax rates to be higher, the traditional IRA is a better option for those expecting a lower tax bracket in the future.

One can also consider splitting between Roth and traditional IRA if they feel that it is rather impossible to predict where the tax bracket will go in the future.

Is choosing between IRAs simple?

The various details explaining the differences between Roth and traditional IRA are based upon endless analysis done with accordance to detailed IRS doctrine. How one chooses depends on the properties of each type and how they fit with the prospective holder’s particular situation. This includes two main factors:

Eligibility: Eligibility for Roth and/or traditional IRA is dependent upon the individual’s income. This entails being within certain income parameters (in case of Roth IRA) and the ability to make tax-deductions (in case of traditional IRA).

Picking a place: With many customers becoming eligible for both varieties of IRA, and even for those eligible for a single type, there can be various choices which can make things overwhelming. The best way to pick up a place for IRA is to go on the basis of the temperament of the holder, i.e. whether they prefer to have their finances managed or are comfortable doing so themselves.

Roth vs. Traditional IRA – 4 Key Differences

Roth and traditional IRAs are similar in the sense that they both act as a great tax-advantaged option for retirement saving. That being said, they also have some key differences:

Taxes: The how and when of getting a tax break is perhaps the biggest difference between the Roth and traditional IRA. While traditional IRAs have the advantage of having tax-deductible contributions, Roth IRAs have the tax advantage of getting withdrawals that are not taxed. In other words, a traditional IRA requires you to pay taxes when you withdraw your earnings during retirement (or even before it), the Roth IRA requires you to pay taxes upfront, but withdraw tax-free.

Contribution limits: Both the Roth and the traditional IRAs have their own sets of eligibility rules and restrictions which determine the extent to which you can contribute. While traditional IRAs have no income restrictions, Roth IRAs require contributors to stay within a certain income threshold.

In case you find yourself eligible for both, you can split your contribution to both accounts in the same year. Just make sure that that your total amount does not exceed the threshold of $5,500 (or $6,500 in the event that you are of 50 years of age and above.

Apart from paycheck size, traditional IRA deductibility considers other factors such as your account tax filing status and if you and/or your partner are covered by any employer-sponsored retirement plan.

Early withdrawals: Generally speaking, it is not a good idea to draw money from an IRA prematurely. In fact, there are rules to prevent just that, chief among them being that you must be at least age 59½ of age or pay taxes and penalties for early withdrawals.

That said, sometimes one must go to that pool of money to fulfill their requirements.

Withdrawing money from a traditional IRA pre-mature levies a 10% early-withdrawal penalty, and also makes the money you withdraw taxable at the current tax rate. Roth IRAs, however, are more lenient and offers better terms to those who withdraw pre-retirement. However, in order to take advantages of said terms, the first Roth IRA contribution needs to be at least 5 years older than the date of the first withdrawal.

Required minimum distributions: Long after all is done, you will be subjected to paying required minimum distributions (RMDs) from your traditional IRA. This often motivates many to make further contributions to make their IRA funds bigger.

This is, however, impossible in case of a traditional IRA, which does not allow for additional contributions once you are 70½. Moreover, you are required to withdraw once you reach that age. Roth IRA, however, is much less stringent, and allows you to keep your savings in the account for as long as you live, while contributing past the age of 70½. If you’re among the many who feel that they don’t need to use their IRA assets straightaway, and can wait for a while, Roth is a great option for them.

ROTH IRA VS. TRADITIONAL IRA – WHICH ONE SHOULD YOU GO FOR?

ROTH IRA VS. TRADITIONAL IRA – WHICH ONE SHOULD YOU GO FOR?

With the time to pay taxes approaching soon, most taxpayers in the US are currently contemplating on what method they should use to save their money. One of these methods being funding IRAs, it is only natural for the ones contemplating those to wonder whether they should opt for a Roth IRA or a traditional one. Each have their own sets of benefits, and prove to be more efficient for certain situations than others.

Are you wondering which IRA you should use? Here are some guidelines to help you understand the difference between the two.

Contribution Limits

Both Roth and traditional IRAs have the same contribution limits. As of 2017, you can contribute up to $5,500 to your IRA. You can also contribute an extra $1,000 as catch-up if you are of age 50 or above by the end of the tax year.

Deductibility

The eligibility of an individual to deduct traditional supplements to an IRA (and therefore receive a tax credit for the year in which the contribution was made) makes for a major factor in deciding between a Roth and a traditional IRA. This eligibility is directly dependent on whether the taxpayers fulfills the minimum requirements.

According to Dan Stewart CFA®, president of Revere Asset Management, Inc., in Dallas, Texas, a traditional IRA can be fully tax deductible if the taxpayer and the taxpayer’s spouse are not participating in any work-based retirement plan (regardless of income), or if they participate in a work-based retirement plan but have an income of $62,000 (if they are filing individually) or $99,000 (if they are filing jointly). Any contributions made beyond those levels will not have any influence over deduction of taxes.

For Roth IRAs, however, contributions are not able to be deducted.

Age Limitations for Contributions

If making contribution supplements to your IRA it is your priority, you must take a close look on the age caps placed on IRA contributions for either types of IRA.

In case of traditional IRAs, contributions cannot be made once the taxpayer has reached the age of 70½. Roth IRAs, however, don’t have any limit of this sort.

Age is not the only factor here, though, the income also determines the ability and eligibility to fund a Roth or traditional IRA. For instance, it is not possible to make contributions to a Roth IRA if the income exceeds a certain threshold. Additionally, the Roth IRA can be lowered should the income ever fall to a certain range. It is thus, always best for taxpayers to consult with the tax advisor to find out the maximum amount they can contribute to a Roth IRA.

Traditional IRA contributions, on the other hand, do not have any such income caps.

Required Minimum Distributions

In order to prevent yourself from having to start distributing your retirement assets before time, taxpayers must heed to the IRA rules for required minimum distributions (RMDs).

Traditional IRA owners are required to take their RMDs by April 1 of the year following the year they reach the age 70½ (which is the contribution age limit). They must, therefore, gradually reduce their IRA balance and add the distributed amount to your income, regardless of whether they actually require the funds.

Roth IRA owners, on the other hand, are not required to follow any RMD rules.

Tax Treatment of Distributions

Yet another factor that determines the which of the two IRAs are beneficial is the tax treatment of distributions. Usually, traditional IRA distributions are regarded like regular income (which therefore can be subject to taxes for your income). Additionally, the amount distributed may be subtracted by the penalties in case the withdrawals have been made before the taxpayer has reached the age of just over 59.

A Qualified Roth IRA distribution, however, is fully exempt from tax and penalty. To get qualified, Roth IRA distributions must meet a few fundamental requirements:

– The allotments must be taken at least 5 yrs after the taxpayer has funded their primary Roth IRA

– The distribution was taken as a result of at least one of the following factors:

The taxpayer has reached the age of 59½

The taxpayer is disabled.

The assignee will receive the full distribution upon death of the taxpayer

The distribution has been used to make a sale on a primary residence ($10,000 lifetime limit)

Splitting Your Contributions:

It may so happen that the taxpayer finds themselves eligible to contribute to either types of IRAs. In that case, they can choose to divide their contributions between their traditional and Roth IRAs. That said, they must take care to not allow the total amount of contributions to both IRA’s to exceed the tax limit. This figure includes the catch-up contribution if the taxpayer is over the age of 50.

Additional fees should also be considered when splitting IRAs. This includes additional fees, like the maintenance fees charged by your IRA custodian/trustee who will maintain both IRAs.

Which one is better?

As expected, this is not a simple “Option A or Option B” answer. The detrimental factor for most taxpayers is their eligibility to deduct their IRA contributions, which often leads them to opting for traditional IRAs. That said, this eligibility does not imply that the traditional IRA is always the better choice.

Roth IRAs have some inherent benefits of their own. This includes things like penalty-free distributions and freedom from RMD rules and taxes, which generally outweigh the benefits of getting a tax deduction.

If you’re still confused, you can use a Roth vs traditional IRA calculator, which can help you logically decide the better account for you.

Traditional IRA or Roth IRA: Which is the right one for you?

Traditional IRA or Roth IRA: Which is the right one for you?

As many today already know, it is not a good practice to simply rely on workplace-sponsored retirement accounts. You must have alternate ways to save, such as stashing extra saving into a personal retirement account (IRAs in short).

IRAs are a good way to save since they make for a better compound and offer better tax benefits. The amount of benefits you get, however, depends on which type you select traditional or Roth.

When it comes to choosing ones, things can get confusing. After all, as of 2015-2016, yearly payments made to both are similar i.e. $5,500 per person for those under the age of 50, and $6,500 for those aged 50 and above. However, according to many experts, the Roth IRA stands as a better candidate since it is more flexible in terms of funding and withdrawing funds and offers bigger tax benefits.

According to Rick Meigs, 401kHelpCenter.com president, Roth IRA is definitely the better option. He particularly finds it better on account of the fact that it does not have the mandatory requirement of taking withdrawals at seventy and one half, and allows people to keep forwarding payments there.

While payments to a Roth IRA are indeed funded with post-tax earnings, they go on to become tax-free and can be withdrawn as such as well, in the event that the account is at least years old, and that you are at least 59 1/2 old at the time of distribution.

Meigs finds the feature of being able to contribute to Roth as long as one earns money particularly helpful, especially for those who intend to work beyond their past traditional retirement years. On the flip side, savers stand to pay a 10% penalty if they withdraw earnings before they turn 59 1/2. After that age, however, they can withdraw the contributions at any time.

It does not come without its problems, however. Sometimes, you may find that you are in fact “earning too much” to fund a Roth IRA. Roth IRAs are generally available exclusively to with a modified A.G.I. that is below of $132,000 in 2016. For married couples filing a joint tax return, this figure stands at $194,000.

In case your income renders you ineligible to funding a Roth IRA, you should consider the traditional IRA. It does have its own set of advantages.

Perhaps the biggest advantage of a traditional IRA is the fact that it allows you to claim a complete income-tax deduction for your contributions. To take that advantage, you must not have access to another work retirement plan, like a 401(k). The income cap for single filers who have access to any such plans is $61,000; they can get a partial deduction if their earning is above $61,000 but below $71,000. Income limits are trickier for married couples who file jointly, those with a plan have a limit that can be anywhere between $98,000 to $118,000. If you don’t have a plan but your spouse does, you can get a limit that stands anywhere between $184,000 and $194,000. Once again, if you don’t have another office-sponsored retirement plan, you can get the full tax deduction for your contributions no matter what your income is.

And in case you cannot claim tax breaks from traditional IRA altogether, you can still make nondeductible contributions to a traditional IRA. Since 2010, you also have the option to convert a traditional IRA to a Roth, regardless of your income and filing status.

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