Henssler Associate Logan Daniel, CFP®, CRPC®, discusses choosing between a Traditional IRA and a Roth IRA for your retirement savings.

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When it comes to planning for retirement, choosing the right investment vehicle is critical. Two popular options for retirement savings are Traditional IRA (Individual retirement account) and Roth IRA. But which one is right for you? Here are some things you need to know to decide whether to contribute to a Traditional IRA or Roth IRA.

Traditional IRA:

A Traditional IRA is a retirement account where contributions are made with pre-tax dollars. That means you can deduct your contribution on your tax return, and the money grows tax-free until you withdraw it. The good thing about a Traditional IRA is that you will pay taxes when you withdraw money after retirement, which will probably happen at a lower tax rate since you will be earning less.

Roth IRA:

A Roth IRA is a retirement account where contributions are made with after-tax dollars, which means that you cannot deduct your contribution on your tax return in the year you make the contribution. The money in the account grows tax-free and can be withdrawn tax-free after you reach age 59½.

Here are some factors to consider when deciding whether to contribute to a Traditional IRA or Roth IRA:

Tax Brackets:

The most important factor to consider when choosing between the two is your tax bracket. If you are in a low tax bracket now and think your tax bracket will be higher in retirement, then a Roth IRA may be right for you, as you will pay the taxes now at a lower rate. On the other hand, if you are in a high tax bracket now and think your tax rate will be lower in retirement, a Traditional IRA may be a better choice as you will pay taxes on the withdrawals after retirement when you will probably be in a lower tax bracket.

Income and Contribution Limits:

Traditional IRA contributions are tax-deductible, and you can contribute up to $6,000 a year, depending on age and income. Roth IRA contributions are not tax-deductible, but there are income limits for contributions. You can contribute up to $6,000 a year to a Roth IRA, but only if your income is below a certain level.

Required Minimum Distributions:

Traditional IRA has required minimum distributions (RMDs), which means that you have to withdraw a certain amount of money from the account each year when you reach 70½ years old. Roth IRA does not have RMDs, so you can leave the money in the account to grow tax-free for as long as you want.

Conclusion:

Deciding to contribute to a Traditional IRA or a Roth IRA depends on individual circumstances, such as income, tax bracket, age, and retirement goals. If you are young, in a low tax bracket, and anticipate paying more taxes in retirement, then a Roth IRA may be the best choice for you, as you have decades for your investments to grow tax-free in the account. However, if you are closer to retirement, in a higher tax bracket, and anticipate paying lower taxes in the future, a Traditional IRA may be a better choice. It’s best to consult with a financial advisor to determine the right retirement savings strategy for your unique financial situation.