Really Simple Retirement Planning

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Take the Roth v. Traditional Quiz!

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Should you put your money into a traditional or Roth IRA?

Take our Really Simple Quiz…

1. Will I be in a higher tax bracket today, or when I retire?

  • Today (generally, high earners and older workers): Traditional IRA 
  • When I retire (generally, low earners and younger people): Roth IRA 
The most important distinguishing factor between Roth and traditional IRA’s is when the money is taxed. If you are a high earner now, you may need the tax deduction in the current year and thus, opt for a traditional IRA. If you’re in a tax bracket that you believe is lower than your tax bracket will be in retirement due to tax hikes, you may be better off contributing to a Roth, and saving those tax breaks for later. In technical terms, Traditional contributions are pre-tax, Roth contributions are after tax. However, on the other end, Roth withdrawals are tax-free and traditional withdrawals are taxed as income. Generally speaking, a Roth IRA is best for low-income and young people, who are likely in the lowest tax bracket of their careers.

 
2. Is there a chance I’ll need to withdraw before age 59 ½?

  • Yes: Roth IRA 
  • No: Traditional IRA 
The government discourages premature withdrawals from your IRA, and therefore levies tax penalties on anyone who withdraws prior to age 59 ½, an unqualified withdrawal, aside from a few exceptions.

It’s possible to make an unqualified withdrawal, that is, a withdrawal before age 59 ½ that’s not on the list of exceptions. No matter whether you have a traditional or Roth, you have to pay income tax on the withdrawal, plus a 10% early distribution penalty. However, traditional withdrawals are taxed on the full amount, whereas Roth withdrawals only tax the earnings.

3. Is there a time (before retirement) when I’ll be making less than I am now?

  • Yes: Traditional IRA
  • No: Roth IRA

Similar to question number 1, it’s about your tax bracket at the time of withdrawal. If you anticipate going part-time, are stepping down from a principal role, and see your paycheck decreasing, then a traditional IRA would be the right choice. You’re likely to pay considerably more taxes at retirement if this is your situation.

Which IRA type did you choose the most? That is your answer for now, but NOT forever. Your answers to these questions may change over time. The retirement vehicle you choose to invest in now, doesn’t have to be the permanent choice. 

To summarize, roth and traditional IRA’s accounts have similarities and differences. Depending on your current and future tax bracket, and need for early distributions, one type of retirement account may be more beneficial than the other. One option would be to contribute to both to add to your tax savings flexibility (tax diversification).

The best place to start is with a financial advisor that can dig deeper into your current and potential situation. Our retirement calculators allow us to calculate the benefits of many different scenarios, for clients in all situations.

Need a free analysis of your financial personal options? Hit the “Work with Kevin” button to find out more! If this information was helpful, make sure to SUBSCRIBE to our blog and share with someone you know that would benefit!

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