Now that we have a new tax law, it is a good time to consider whether a traditional IRA or a Roth IRA is right for you. While there is no right or wrong answer because everyone’s set of circumstances is different, it might be helpful to review your situation since there are new tax rates that take effect in 2018.
Let’s start by reviewing the basic rules of traditional IRAs and Roth IRAs.
With a traditional IRA your current taxable income can be reduced by the amount you contribute or contributions can be non-deductible. The deductibility of the contribution depends on whether you are an active participant in a retirement plan and it depends on the amount of your modified adjusted gross income. With a traditional IRA, you are not taxed on the earnings in the account until the money is withdrawn in the future. Withdrawals from traditional IRAs arising from deductible contributions are included in taxable income, and these withdrawals are also subject to penalties (with certain exceptions) if withdrawn before age 59 ½.
With a Roth IRA, you do not get a tax deduction for the amount of your contribution, and you also do not pay tax on withdrawing the money you contributed when you retire. Unlike a traditional IRA, you will pay no taxes on the earnings of the account if you have had the Roth IRA for at least five years and you withdraw the investment earnings after age 59 ½.
Factors to Consider
One of the most important factors to consider when comparing traditional IRAs with Roth IRAs is whether you expect your current marginal income tax rate to be higher or lower than the income tax rate when you retire and begin taking withdrawals. The most common argument for using a traditional IRA is based on the assumption that you will be in a lower tax bracket when you retire. If you expect to be in the same or higher tax bracket when you retire, then the Roth IRA is probably the better choice.
If you do not have any idea if your income will be higher or lower in your retirement years, then you should consider the required minimum distribution rules for traditional and Roth IRAs. Roth IRAs are not subject to the required minimum distribution rules. With traditional IRAs, you must begin taking distributions for the year in which you reach age 70 ½.
When deciding between traditional IRAs and Roth IRAs, it is not unusual to be uncertain about which type of account to use. However, do not let the uncertainty of future tax rates and rules regarding these accounts stop you from contributing. No matter which type of account you choose – traditional IRA or a Roth IRA – you will be better off saving for retirement than not.
Price CPAs is prepared to support you in the planning process – and help you follow through on those plans. Call us (615-385-0686) or contact us through our website (www.pricecpas.com) to explore how our services can be of value to you today.