When a traditional IRA makes sense versus a Roth account

Saving in an IRA makes sense whether or not you have a retirement plan at work, but investors then have to decide whether a traditional or Roth account is better — as always, it depends.

Retirement Tip of the Week: Roth accounts are a good choice for young workers based on their income potential, but there are a few reasons traditional IRAs may be a better financial choice.

MarketWatch is hosting a virtual event, Mastering Your Money, which includes sessions on a variety of important personal finance topics. During a session, reporters and editors will tackle some of the most controversial personal finance decisions, including when to invest in a traditional IRA or Roth IRA, whether leasing or buying a car makes the most sense, and why you might or might not want to go with one health savings account. Join us for the Financial Face-Off session on Wednesday, April 20th here.

Traditional IRAs are particularly useful for people who expect to be in a lower tax bracket when they retire, since contributions are paid on a pre-tax basis (that is, taxes are paid on the money that comes out, not the money that comes in). Of course, it’s not always easy to estimate – by the time you retire in the next few years you might have a better idea of ​​what your tax bracket will be, but when you’re a few decades away it’s hard to know what your personal ones will be financial conditions will be like or what tax laws the government may change.

Another reason to opt for a traditional IRA: They may be tax-deductible, although this depends on whether you are enrolled in an employer-sponsored retirement plan (like a 401(k) plan), your tax status, and that of your spouse income limits. However, that tax deductibility can be quite powerful during tax season — according to one analysis, it could add up to $1,000 to your tax bill if you’re in the 32% tax bracket and paying the $6,000 annual cap.

You also have until tax day to make a contribution to last year’s IRA. So if your tax bill to Uncle Sam is a bit higher than expected and you haven’t yet contributed the maximum of your IRA last year, you can tell Investment Firm to transfer your last contribution to last year’s account. Simply let the company holding your account know – if not, the contribution will automatically go into your IRA for the current year – and make sure it’s done by tax day (this year has passed that deadline).

There are many rules associated with Traditional and Roth IRAs. For example, you must be 59 ½ years old to freely withdraw from either account, but you must also start withdrawing from your traditional IRA by age 72, known as required minimum withdrawals. Roth accounts do not have RMDs. Congress is also considering raising the age for required minimum distributions in its successor legislation to the Secure Act, passed in 2019.

See also: Do you have an extra $50? $100? Even $20? Use it on an IRA for your future retirement (maybe even sooner)

Not everyone agrees that traditional IRAs are the way to go, such as personal finance speaker Suze Orman. And Roth accounts come with their own perks too — for example, investors can tap into these accounts before the age of 59½ if they just withdraw from their capital. You only pay taxes and penalties on the earnings from these accounts.

However, both accounts allow for penalty-free distributions, such as B. Death or disability, up to $10,000 for a first-time home purchase and qualifying educational expenses. It’s important to understand the rules for a traditional IRA or a Roth IRA to avoid paying more penalties and taxes than necessary.

And remember, if a Roth ultimately sounds like a more attractive proposition but you’ve been investing in a traditional IRA all along, there’s an opportunity to convert some of your wealth into a Roth. You would have to pay the taxes on the conversion at the time of that conversion, but it might be worth it if you are already in a low tax bracket and expect to be in a higher tax bracket at the time these monies are distributed. When a traditional IRA makes sense versus a Roth account

Brian Lowry

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