Maybe you’ve decided you want to begin putting more money away for retirement. It’s pretty straightforward, right? Actually, there are a few options to consider, including whether you want a Traditional IRA or Roth IRA. One account might be more beneficial, depending on your situation.
The tax benefits the different accounts offer could affect you depending on various personal factors, according to Motley Fool.
Here are the four questions to ask yourself to help you settle on a retirement account:
How does your age factor into the benefits of the accounts? Your age can actually affect the efficiency of your retirement saving. According to the article:
Generally, the younger you are, the more it makes sense to invest in a Roth IRA over a Traditional IRA. This is because you have more time to invest your money which means you'll have a larger benefit in retirement than an older investor.
What is your income level? If you have a high annual income and therefore find yourself in a high tax bracket, it might make sense for you to open a Traditional IRA because you’ll save more in taxes from a Traditional IRA’s tax deduction.
One other note about income: The Roth IRA has income limits which bar you from using the account if you make more than a certain amount - $129,000 for single filers and $191,000 for married couples.These limits increase to $131,000 and $193,000 respectively in 2015.
When will you need the money? Another difference between the Traditional and Roth IRA is the age at which you can access the money. Roth IRA rules state that you can access the money in the account after you reach age 59½, provided you’ve waited the required 5-year seasoning period. You also are permitted to withdraw the initial amount contributed to the Roth at any time.
The Traditional IRA, on the other hand, requires that you wait until age 70 ½ to take distributions without penalty.
You’ll also want to note that with a Traditional IRA, Required Minimum Distributions are in effect, meaning you’re required to make a withdrawal from your account each year after you reach age 70½.
Both accounts administer tax penalties if you don’t follow the distribution rules.
What do you expect your income level to be after retirement? With a Traditional IRA, you’re taxed when you take the money out of the account, unlike the Roth, which gets taxed when you make contributions. If there’s a good chance you’ll be in a lower tax bracket after you retire and aren’t receiving as much income, then you’ll save on taxes by deferring them until you’re ready to take Traditional IRA withdrawals.
If you’d like to further discuss your personal situation and which account might be more suitable for you, schedule a free one-on-one IRA checkup
with one of our Senior Account Executives and talk through the scenarios.