Roth IRA vs. Traditional IRA

A Roth IRA (Invidividual Retirement Account), may be a better way to save for your retirement. The main advantage of the Roth IRA is that withdrawals from the account are tax-free. On the other hand, the deposits made into the IRA are not tax-exempt. This is the opposite of traditional IRAs, contributions into which are tax-deductible, while withdrawn funds are taxed as normal income.

To see why the Roth IRA is the better option, consider this: Your tax on the Roth IRA contributions will likely be higher, since your reported total income will be in a higher tax bracket. Your income, however, will likely increase as you get older, and your ability to make larger contributions will, as well. Once you retire, your IRA will become your primary income source, and so your ability to pay taxes will be limited. A Roth IRA affords you much greater flexibility, since withdrawals from a Roth IRA are not taxed.

A Roth IRA allows you much greater flexibility than a traditional IRA. With a traditional IRA, you would have to start withdrawing money when you turned 70 ½, but with a Roth IRA, you can let it continue gaining interest – still tax-free – and live off other savings you may have accumulated.

There are certain guidelines you must meet to both qualify for a Roth IRA and to not suffer from an early withdrawal tax penalty. To open a Roth IRA, your Adjusted Gross Income (AGI) must not exceed $110,000 if you are single and $160,000 if you are a couple filing joint tax returns. To convert (roll over) an existing IRA into a Roth IRA, your and your spouse's combined AGI must not exceed $100,000. There is also a maximum amount you can contribute to a Roth IRA in any given tax year. To avoid early withdrawal penalties, you must not withdraw before you turn 59 ½ and five years have passed since the establishment of the IRA.

A Roth IRA is generally a better choice as a savings vehicle. The specifics of your financial situation may change. To determine which IRA will serve your needs best, please click here to consult with a savings advisor.