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How should I decide which type of IRA (traditional or ROTH) is best for my needs?

February 8, 2013

Advisor answers

Lyman Howard

Lyman Howard

CFP®, CFA
San Francisco, CA

The essential difference between a traditional IRA and a Roth IRA is when the taxes are due on the money you deposit into the account and the earnings which they produce over time through investing. Thus, your determination of your personal tax status today versus your future tax status when you will be taking withdrawals will make a Roth more or less attractive. There are also other considerations, to be sure.

Because a traditional IRA allows deductible contributions, you avoid paying income tax today on the money you put in. When y...

Bonnie Sewell

Bonnie Sewell

AIF®, CFP®, CDFA
Leesburg, VA

It's the rare person who can't benefit from having differently taxed accounts in retirement. Plan to have taxable, tax-deferred and Roth accounts at retirement. This way you can devise strategies for withdrawals that make sense when you are withdrawing.

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Kimberly J.  Howard, CFP®

Kimberly J. Howard, CFP®

CRPC, ADPA, CFP®
Newton , MA

IRAs come in two types:Traditional and Roth. To determine which one is best suited for your annual contribution,here are some key factors to consider:

Advantages to a Traditional Deductible IRA:

  • Tax Deductible: Your contribution is deductible on your federal income tax return for the year in which you contribute.
  • Tax-Deferred Growth: Your contribution grows tax deferred until you withdraw the money. This means you do not pay any taxes while your money is growing.

Limitations to a Traditional Deductible IRA:

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David Meyers

David Meyers

CFP®
Palo Alto, CA

In addition to the excellent answers provided by the other advisors here, I'd like to elaborate a little bit on the point regarding early withdrawals, as well as a quick point regarding estate taxation.

Direct contributions to a Roth IRA may be withdrawn without tax or penalty at any time. No such provision exists for traditional IRAs.

Distributions from a Roth IRA may be "qualified" or "non-qualified" (mainly related to whether you are over or under 59.5 when you take the distribution, but there are other qualifying circumstances...

John Buerger

John Buerger

MSFS, CFP®
San Luis Obispo, CA

Here's a simpler answer for everyday people -

A regular IRA is taxed at the time you take the money OUT (ideally in retirement). A Roth IRA is taxed at the time the money is put into the account.

If your income tax rate is lower today than it will be when you are going to take the money out after age 59.5 (example, you are young with lots of pay increases in your future), then it would be crazy to avoid paying taxes today at a low tax rate so you can pay taxes on that money in 40 years at a much higher rate.

If on the other hand you are ...

Nick Rugh

Nick Rugh

CRPC
Palo Alto, CA

Since a regular IRA provides a current year tax deduction it may be the better choice. But the Roth could be a better option if you are in a lower tax bracket. If your tax bracket is below 25% then you might want to consider a Roth since a current year tax deduction wouldn't be as beneficial for you as it would if you were in a higher income tax bracket. Each individual is unique so consider consulting with a financial advisor for a thorough evaluation.

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