Making The Right Choice For Your Retirement: Traditional or ROTH?
With the tax deadline fast approaching, the difference between a Traditional and a Roth IRA is something that investors should take into consideration when allocating their retirement funds. While both forms of the IRA are great vehicles to save for retirement, each offers distinctive advantages. The Traditional IRA allows a person to make tax-deductible contributions (depending on income level). Why is this significant? It allows a person to deduct the amount they contribute from their income reported on their tax return as long as they are not barred by their level of income. However, tax will be paid on earnings when withdrawn from the IRA. While Roth IRA contributions are not tax-deductible, all earnings and principal are 100% tax free if all the rules and regulations are followed.
You should consult with your CPA before deciding whether to contribute to a Roth or a Traditional IRA. In general, the decision really should be based upon your tax bracket. Will it be lower or higher when you retire is the definitive question you should ask yourself. If it will be higher, then the better option would be the Roth IRA. Otherwise, it would be more prudent to select a Traditional IRA. The Roth IRA is going to make more sense in most situations but unfortunately, not everyone qualifies for a Roth. Also, the effect of potential changes in government policy regarding the tax rate and the tax advantaged status of both accounts should also be factored into the equation. There are still further distinctions between both forms of the IRA, but the bottom line is that the power and limitations of both should be studied thoroughly in determining which one best suits your long term financial needs and goals.
The most important consideration in today's economy is your tax planning. By contributing to the right IRA you have the advantage of compounding wealth on a tax deferred or tax free basis. Which is the better choice? It really is up to you!
Munzer Ghosheh, Business Development Manager
mghosheh@theentrustgroup.com