How to Choose Between a Traditional IRA and a Roth IRA

Many U.S. taxpayers want to invest in an IRA, but when it comes to understanding which one is best for them and why, they are unsure. By determining the best IRA for your investment dollars, you'll make your money work for you and reap the benefits.

Instructions

Difficulty: Moderate

Things You’ll Need:

• Internet access
• Calculator
• Investment books

1. Understand that IRAs have annual contribution limits. Limits for both IRAs are the same, and the limit is scheduled to increase every several years. When you are ready to invest, browse the Internet or check with a financial planner to find out the current limit.
2. Learn about the tax deductions of each IRA. One benefit of a Traditional IRA is the potential for tax deductions during the year that you contribute. However, Roth IRAs use post tax dollars, so you are not taxed years later when you want to access the funds.
   
3. Determine the flexibility you'll need in accessing invested IRA funds in the future. Roth IRA funds are often touted as offering the most flexibility in accessing funds.
   
4. Know if your income prohibits you from making a particular IRA investment. In some cases, higher incomes can preclude certain investments.
5. Do your homework. In addition to many investment books in print, the Internet provides numerous sites for researching this topic. By learning more about the benefits of Traditional and Roth IRAs you can learn the nuances of each that make one or another the best choice for you.
6. If you need further assistance in determining which option is best, work with a certified financial professional.

Tips & Warnings

• Make sure every investment you consider is realistic in relation to your income and budget.
• Never invest money when you don't feel comfortable doing so. Always ask questions until you feel competent regarding the placement of your money. If you are still uncomfortable, it may be a red flag that another route is the best for you.