Roth vs. Traditional: Which Is Right For You?
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When it comes to saving for retirement, one of the biggest decisions you’ll have to make is whether to invest in a Roth IRA or a traditional IRA. Both options have their own set of benefits and drawbacks, so it’s important to understand the differences between the two in order to make an informed decision about which is right for you.
A traditional IRA allows you to make contributions with pre-tax dollars, meaning that you can deduct your contributions from your taxable income. This can provide an immediate tax benefit, as your contributions lower your taxable income for the year in which you make them. However, you will have to pay taxes on your withdrawals in retirement, which can potentially result in a higher tax bill down the road.
On the other hand, a Roth IRA allows you to make contributions with after-tax dollars, so you won’t get an immediate tax benefit. However, your withdrawals in retirement are tax-free, which can be a huge advantage if you anticipate being in a higher tax bracket in the future. Additionally, Roth IRAs have no required minimum distributions (RMDs), meaning you can keep your money invested for as long as you like without being forced to withdraw it.
So, which is right for you? The answer depends on your individual financial situation and goals. If you expect to be in a lower tax bracket in retirement, a traditional IRA may be the better option, as you can take advantage of the tax deduction now and pay taxes at a lower rate later on. On the other hand, if you anticipate being in a higher tax bracket in retirement or if you want to benefit from tax-free withdrawals, a Roth IRA may be the way to go.
It’s also worth considering factors such as your age, income level, and retirement goals when deciding between a Roth and traditional IRA. For example, younger investors who have more time for their investments to grow may benefit more from a Roth IRA, while those closer to retirement age may prefer the immediate tax benefits of a traditional IRA.
Ultimately, the choice between a Roth and traditional IRA is a personal one that should be made based on your individual circumstances and financial goals. It’s a good idea to consult with a financial advisor to help you determine which option is best for you and to create a retirement savings plan that aligns with your objectives. Whether you choose a Roth IRA or a traditional IRA, the most important thing is to start saving for retirement as early as possible to ensure a secure financial future.
My wife and I used traditional IRA and 401k for our investing. We got a bit of a late start so only saved for 20-25 years, and because of the late start invested every nickel we could find including tax saving, which averaged $4,500/year in taxes. That extra $100,000 also grew at whatever the market compounded, $4,500/year for 25 years at 6% equals $250,000, and that continues to grow at market rates! I'm currently retired and pay roughly $5,000/year taxes and even with RMDs, using QCD, that won't change until mid 80s. I don't think I'll live long enough to ever pay $250,000 (plus the growth) in taxes!
So my Federal is 22%, State is 5.7. Should I switch entirely to traditional? Or split them because it’s close?
We don’t have a mortgage, husband is now retired and wants to travel. We don’t splurge or anything like that. Inflation has hit hard and we want to relocate while growing his 401k which is minus 2 M atm. I'm cautious than ever with rising costs. What is your opinion? Happy to discuss.
It’s worth mentioning that the TCJA income tax breaks will expire at the end of 2025. I think that can make a difference for people who are planning to build a mix of traditional and Roth retirement accounts, especially for those within that taxable income grey area. I’d consider leaning harder into the Roth contributions over the next few years because a lack of action by congress (imo a safe bet lol) will result in a “tax increase” for most people in 2026. At that point, consider readjusting your contributions to more heavily add to the traditional retirement accounts