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Should I Invest in a ROTH or Traditional IRA?

Should I Invest in a ROTH or Traditional IRA?

October 13, 2023

“Should I contribute to a ROTH or Traditional IRA?” We get this question from clients of all ages and walks of life.  Everybody’s situation is going to be a little different with these accounts.  There are several things to consider, such as your current age, investment time horizon, tax bracket, and where you will be down the road during retirement.  Both the ROTH and Traditional IRAs have some positives and negatives to them.  Let’s do a high-level review of these accounts, without getting into every nuance.

The Roth IRA is an account that you will get taxed on the front end, meaning you are not going to get any tax deduction upfront.  If you fund a Roth IRA, then later in life during retirement (assuming you meet a few qualifications) you will be able to pull the money out completely tax-free.  All the earnings that have grown in this account for the last 20 to 30 years will be tax-free! With a Traditional IRA, however, you receive the tax deduction upfront (assuming you meet certain qualifications).  In this year’s tax return, you would get to deduct the amount you invested during the current year.  Then, later in life when you withdraw the funds, you would be taxed for the money at that time.

Back to our original questions on whether to fund a Traditional IRA or a ROTH.  A good financial advisor can walk you through this because they will have a better picture of who you are and what your needs may be in the coming years.  The younger you are, the better off you are funding a ROTH IRA.  When you are younger, you are more than likely going to be in a lower tax bracket.  You can put that money that has been taxed at a lower rate into a ROTH RIA account and let it grow for 30 or 40 years.  Once you begin to pull the money out during retirement, it is going to be completely tax-free.  Many younger people may have access to a 401(k), 403b, and maybe even a pension.  Any money put into a 401(k) will be fully taxed at retirement, having an account to withdraw from that is tax-free for a new car, a down payment on a vacation home, or even buying a boat would be great!

A good financial advisor will help you to walk through this as not everyone’s scenario is the same.  Give us a call sometime, we would love to walk you through deciding if a ROTH IRA or Traditional IRA is right for you.

* Withdrawals of taxable amounts from traditional IRAs are subject to income tax, and if taken prior to age 59 ½, a 10% federal tax penalty may apply. Early withdrawals may be subject to withdrawal charges. If converting a traditional IRA to a Roth IRA, you will owe ordinary income taxes on any previously deducted traditional IRA contributions and on all earnings. Distributions from a Roth IRA, including accumulated earnings, may be made tax-free if the account has been held at least five years and the individual is at least 59 1/2, or if any of the IRS exceptions apply.