IRAs

Which is better, a traditional or Roth IRA?

Unfortunately, there’s no one-size-fits-all answer that doesn’t involve a little guesswork.

Assuming you’re eligible for both a Roth and a traditional IRA (if you’re not eligible for a Roth the answer is easy], it depends on how you expect your tax bracket to change when you retire.

If you expect to be in a lower tax bracket when you retire, you’re better off with a traditional IRA. By deducting your contributions now, you lower your current tax bill. Then when you retire and start withdrawing money, you’ll be in a lower tax bracket, thereby giving less money overall to the tax man.

Conversely, if you expect to be in the same or higher tax bracket when you retire, you may instead want to contribute to a Roth IRA, which allows you to get your tax bill settled now rather than later.

Not sure what tax bracket you’ll be in later in life? Join the club! Particularly if you’ve got a long way to go until you retire, you probably have no way of figuring this out. So your best option may be to keep your retirement savings tax diversified, meaning you have accounts that will be both taxable and tax-free when you cash out in retirement. For example, if you already have a tax-deferred 401(k) plan through your employer, you might want to invest in a Roth IRA if you are eligible.

Another angle to consider is that the Roth also offers more flexibility. You can withdraw your contributions (but not the earnings) without incurring a penalty so you have more access to your money. So if you’ve got a long way to go before retirement, and you’re concerned about locking away your money for too long and want to be able to get at it if you need it, a Roth might be the way to go.

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