Traditional vs. Roth: Which IRA Type is Right For You?Submitted by FSB Premier Wealth Management on October 10th, 2014
One of the questions that I get asked quite a bit from clients is which type of IRA should they have, a traditional, Roth or both. To begin, let’s consider what is similar about them. Both allow you to make annual contributions of up to $5,500 in 2014, if you have at least that amount of compensation and fall within the income limitations. That number rises to $6,500 if you are 50 or over. Keep in mind that these numbers represent the total contribution limit between both traditional and Roth IRAs for 2014. This means you can use both, but you are limited to either $5,500 or $6,500 in contributions between them. Additionally, both types offer tax-deferred growth of earnings and a wide array of investment choices. Now, let’s explore the differences between traditional and Roth IRAs.
Anyone with taxable compensation who is under the age of 70 ½ can contribute to a traditional IRA. Contributions made to a traditional IRA may be tax deductible on your federal income tax return, lowering your income tax liability for the year. When you take funds out of your traditional IRA, you will be responsible for paying federal (and state, if applicable) income tax on your distributions. When you reach the age of 70 ½, the federal government requires traditional IRA account holders to begin taking minimum distributions and there are stiff penalties if you do not comply.
Your ability to contribute to a Roth IRA in any year depends on your modified adjusted gross income (MAGI) from your federal income tax return. The numbers vary depending on your tax filing status. For example, a single person could not make a Roth IRA contribution in 2014 if his MAGI is over $129,000. Contributions to a Roth IRA are not tax deductible – only after-tax dollars may be invested in a Roth IRA. Perhaps the greatest benefit of a Roth IRA comes when you take distributions. As long as you have had the Roth open for 5 years and you are at least age 59 ½, your distributions will be completely federal income tax free (and state income tax free as well, if applicable). Additionally, you can always withdraw your contributions to a Roth IRA without penalty since they were made with after-tax dollars. There is no requirement to begin taking minimum distributions with a Roth IRA and you can keep contributing to it after you reach 70 ½, as long as you have taxable compensation.
Assuming you qualify to use both, which choice is best for you? Generally speaking, if you will be in a lower income tax bracket when you plan to take distributions then you are currently, a traditional IRA may be right for you. Conversely, if you will be in the same, or higher, income tax bracket when you plan to take distributions, a Roth IRA would probably be the way to go. Contact me today to discuss which plan may be right for your situation.
Jordan Alborn, CFP®
VP/Financial Advisor – FSB Premier Wealth Management, Inc.
This material is provided for general information and educational purposes based upon publicly available information from sources believed to be reliable. Any opinions expressed are my own, which are derived from my experience and background as a financial advisor. They do not represent those of my employer, FSB Premier Wealth Management, Inc., or any of its affiliates including Farmers State Bank.