Personal Finance 101: IRAs – Are You Team Traditional or Team Roth? Part Two

By Brittany Mollica

You’ve mastered the basic differences between a Traditional and a Roth IRA (by reading part one of this post) and you’re ready to start saving. Now, it’s game time: which type of account should you use? There’s no right or wrong answer, but there are a few items you should think through before making your decision.

First – what do you anticipate your Modified Adjusted Gross Income (MAGI) to be for the tax year? From our previous post, you know that there are income limitations that might eliminate one of your options. If this is the case, you have an easy decision.

However, if you’re eligible to contribute to either type of account, then you need to strategize. Would you benefit more from a tax deduction now or tax-free withdrawals later? Do you anticipate your tax bracket being higher or lower in the coming years? A helpful analogy is to imagine you’re a farmer planting seeds that you hope to harvest in retirement. Would you rather pay tax on the seeds now and get to harvest the crops tax-free (Roth), or plant the seeds tax-free but have to pay tax on the crops (Traditional)?

However, retirement may feel far away for many of us, and it’s impossible to know exactly what your tax bracket will be in the future. For this reason, you may choose to split your contributions between Traditional and Roth IRAs, as this will give you a mix of both taxable and tax-free savings that you can use during retirement.

It’s also helpful to know that, with a Roth IRA, you may withdraw the amount you’ve contributed at any time, tax-free and with no penalties. This can be useful if you face a large, unexpected expense that you cannot cover with your cash reserve.

One final consideration: maybe you expect to save more money than you’ll need in pre-tax accounts, such as your employer’s Traditional 401(k), but you’d like to save more. The Roth IRA becomes more attractive, because it will pass to your heirs when you die. They will thank you, because they’ll inherit this account income-tax-free, whereas they would have to pay income tax on Traditional IRA assets that they inherit.

It can be difficult to decide whether you’re Team Traditional or Team Roth, but what’s most important is that you’re planning for your future either way! And you don’t have to do this alone. A financial advisor can guide you. Let us know if we can help.

This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. 

Hilltop Wealth Advisors does not provide tax advice.  The tax information contained herein is general and is not exhaustive by nature.  Federal and state laws are complex and constantly changing.  You should always consult your own legal or tax professional for information concerning your individual situation.