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Traditional VS Roth IRA

The Great Debate

The Great Debate

While "debate" may be a strong term, a thorough conversation may help bring clarity to a topic. 

We believe comparing the Traditional IRA and Roth IRA features, then applying those features to your situation, will lead to the best outcome for you.

While few enjoy paying taxes, both the Traditional IRA and Roth IRA require payment of taxes, one in the future and one in the present.  Paying now or later is the topic to solve for your situation. 

 


Current Income-Tax Deduction


Deadline To Make Contributions


Required Minimum Distributions


Tax-Deferral Of Earnings & Gains



Taxation Of Withdrawals 

Traditional IRA

Contributions may reduce current income tax


By The Tax Return Due Date (no extensions)


Required Beginning Age 73 And Thereafter*


Tax-Deferral Of Earnings & Gains



Taxable as income in the year received, withdrawals prior to age 59 1/2 may be subject to a 10% penalty tax, unless an exception applies

Roth IRA

Contributions Are Not Deductible


By The Tax Return Due Date (no extensions)


Not Required


Tax-Deferred Earnings Until Withdrawn,

Tax-Free For Qualifying Withdrawals


For qualified distributions, no income tax applies under current tax law.  Withdrawals of earnings prior to age 59 1/2 are taxable as income, with an additional 10% penalty tax on earnings unless an exception applies.  Cumulative net contributions are distributed tax-free at any time.

Pay Now Or Later

Contributions to a Roth IRA are made with after-tax dollars or take-home pay.  The funds used to purchase the Roth IRA have already been taxed, the taxes are paid in the present.  Under current tax law, future qualified distributions are free from income tax.

With a Traditional IRA, contributions help you reduce current income tax and are deferred until withdrawn, with tax payment in the future.  

Which Is Better?

Both the Traditional IRA and Roth IRA have tax benefits.  Your situation in the present and expected situation in the future may help determine when the utilizing the tax benefits are most beneficial to you.

If You Believe Your Income Will Be The Same Or Tax Rates Will Be The Same During Your Retirement

If you anticipate your overall income will be the same or perhaps somewhat lower in your retirement years, or anticipate lower income tax rates rates in the future, then a deductible Traditional IRA may be a better opportunity.

For example, during your working years you are in a 22% federal income tax bracket, saving $5,000 in a Traditional deductible IRA may reduce your income tax by $1,100, essentially saving $5,000 for a net cost of $3,900.  In retirement, if you believe your income may be lower, and you are perhaps in a 12% income tax bracket, a $5,000 withdrawal from the Traditional IRA will create $600 in tax consequence.  Examples are for illustrative purposes and not intended as tax advice.

The same concept may apply if you believe income tax rates may decline in the future.  Speculating what Congress might do is less predictable than thoroughly planning our retirement incomes.  If you believe your income or tax rates will be the same or lower in your future, deferring taxes to a later time by contributing to a deductible Traditional IRA may provide substantial tax savings in the present and tax-deferral to the future.

If you plan to gift your IRA to charity in the future, a deductible IRA contribution helps you save tax in the present, while the charity would still receive the gift tax-free.   

If You Believe Your Retirement Income Or Tax Rates Will Be Higher During Your Retirement


If you anticipate your overall income will be the same or higher in your retirement years, or anticipate higher income tax rates rates in the future, then a Roth IRA may be a better opportunity.

For example, during your working years you are in a 22% federal income tax bracket, saving $5,000 in a Roth IRA required you to make about $6,400 to net $5,000 after taxes.  This $1,400 of taxation represents paying the tax currently, to enjoy the tax-free income the Roth IRA may generate in the future.   In retirement, if you believe your income may be higher, and you are in a 22%  or 32% income tax bracket, it won't matter for income tax purposes, as under current tax law qualified Roth IRA distributions are free from income tax.  Examples are for illustrative purposes and not intended as tax advice.    

The same concept may apply if you believe income tax rates may increase in the future.   Speculating what Congress might do is less predictable than thoroughly planning our retirement incomes. If you believe your income or tax rates will be higher in your future, paying taxes currently to contribute to a Roth IRA may provide substantial tax savings in the future.   

Traditional (deductible) IRA

Withdrawals from deductible Traditional IRAs are considered taxable income in the year received.

Withdrawals prior to age 59 1/2 are generally subject to an IRS imposed 10% penalty tax, unless an exception applies.  There are also pre-59 1/2 distribution strategies that may avoid the tax penalty.

Roth IRA

Withdrawals of your cumulative contributions to Roth IRAs are tax-free at any time.

Withdrawals of earnings are tax-free if you have:

  • Held the account for 5 years and are: Age 59 1/2 or older; Disabled; or Deceased

Withdrawals of up to $10,000 may be distributed tax-free after 5 years to buy your first home

Withdrawals of earnings prior to age 59 1/2 are generally subject to an IRS imposed 10% penalty tax, unless an exception applies. 

A Balanced Strategy

Suppose you plan to have Social Security or a pension income as part of your retirement income. These payments are generally considered taxable income, which will be taxed at future tax rates.   Similarly, pre-tax retirement plans like 401(k), 457(b), or 403(b) plans are also taxable income when withdrawn.

Accumulating funds in a Roth IRA may help provide another source of retirement income that may keep you in a lower overall marginal tax bracket in retirement.  Conversely, a Traditional IRA may help you accumulate a larger pre-tax fund to use in the future when your income may be lower.

A thorough financial plan may help you put all your future retirement income sources in a perspective that considers current and future taxation.

Our Advisors Well Help You Determine What Is Your Best Strategy

Our Advisors Well Help You Determine What Is Your Best Strategy

We work with you to evaluate what type of retirement savings strategy or combination of strategies may be the best fit for your situation. 

Our advisors have experience with simple to very complex financial situations and the available tax-qualified retirement programs available that may work well for your situation.

Let's talk about what makes the most sense for your situation.

Plan Well!  Invest Efficiently!  Relax!

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