Roth IRA vs. Traditional IRA
There are several options to look into when you want to start an IRA or continue to put away money for the future. The two primary choices are a Roth IRA or Traditional IRA. It is important to ask your accountant or advisor if you qualify due to income limits and 401k disqualifications.
Here are the differences between a Roth IRA and Traditional IRA:
With a Roth IRA, you contribute after-tax dollars into an account that will never be taxed. That is, the earnings in the Roth are tax-free and you can withdraw your funds during retirement tax-free. The maximum contribution in any year is $5,500 ($6,500 if you are over 50). This is a good choice for those in a low tax bracket (since it is not tax deductible) and for individuals whose tax bracket is expected to be high during retirement.
The other option is a Traditional IRA. If you qualify you can contribute $5,500 per year ($6,500 if you are over 50), and this amount is deductible on your tax return. This option is better for individuals in a high tax bracket, as the contribution will lower your tax expense. It is also good for those who believe their tax bracket will fall from their working years into retirement. Most of our clients experience this (higher brackets while they are working and lower brackets when they retire). The Traditional IRA allows the funds to grow tax-free. However, the money is then taxable once it is withdrawn during retirement.
Keep in mind that, overtime, you may end up with both types of IRA’s. This is a real benefit when you retire, as you can tax distributions from one or the other based on that year’s income. During low-income years you want to take Traditional IRA distributions, and during high-income years you want to take from your Roth IRA.