Roth or traditional IRA: Which is right for me?

If you have begun researching how to start saving for retirement, you have probably discovered individual retirement accounts (IRAs). An IRA allows you to make contributions on your own without having to go through an employer’s plan. This makes an IRA a great option for people whose work does not offer retirement benefits.

Like an employer-sponsored 401(k) plan, an IRA offers tax advantages for the contributions made into it. However, there are different types of IRAs that offer different advantages. Let’s break down the main two together: the traditional IRA and the Roth IRA.

What is the difference between a traditional and Roth IRA?

As of 2021, both a traditional and Roth IRA have a contribution limit of $6,000 (or $7,000 if you are 50 or older). The main difference between the two lies in how they offer tax advantages. 

In a traditional IRA, you make contributions with pretax dollars. These contributions can generate returns over years of saving and investing while growing tax-deferred. You only pay taxes when withdrawing after your eligible retirement age or if you withdraw early (withdrawing early may also incur a 10% penalty).

In a Roth IRA, contributions are made with post-tax dollars, meaning you pay taxes for the contributions upfront rather than when you withdraw. Over the life of the Roth IRA the money also grows tax-deferred, and if you follow the rules it can be withdrawn tax-free. You are eligible to withdraw earnings after your eligible retirement age and if you have had the account for at least five years. However, you may withdraw just the post-tax contributions anytime without a tax or penalty. You would only have to pay an early withdrawal penalty on earnings and non-post-tax contributions.

Should I choose a Roth or traditional IRA?

Deciding which type of IRA is right for you depends on a number of personal factors. On the surface level, a traditional IRA is a good option for those who expect to be in a lower tax bracket when retired since your tax rate on withdrawals would be lower than on your contributions. 

A Roth IRA may be a better option for you if you expect to be in a higher tax bracket when retired. It offers increased flexibility in retirement spending in knowing that the money you withdraw from it is all yours to spend instead of being subjected to taxes. Plus, traditional IRAs have annual required minimum distributions (RMDs) beginning at age 72 but a Roth IRA does not, meaning you can save it for a rainy day without having to make minimum withdrawals from it when you would rather not.

Talk to a ProVise CFP® professional about your retirement planning

At ProVise Management Group, our CERTIFIED FINANCIAL PLANNER™ professionals can get to know you and your current financial circumstances, goals, risk tolerance and personal values to help you develop a plan that works for you. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.

Are you ready to talk to a professional about using a Roth or traditional IRA? Contact ProVise today to schedule a complimentary consultation.