Which IRA Is Right for Me?
When IRAs first appeared, workers had only one type of plan available. But as the years went on, a new option was introduced to the mix. Workers now have to consider a number of factors to determine whether a traditional deductible IRA or a Roth IRA is the best choice.
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Traditional IRA
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With a traditional IRA, you can take a deduction when you do your taxes. That lowers the amount of income subject to taxation and helps boost your refund, or at least reduce the amount of taxes you owe. If you want to know how much your IRA deduction will affect your taxes, you can use an online tax preparation form or one of the popular tax preparation software packages to run the numbers.
Roth IRA
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If you choose a Roth IRA instead, you give up the immediate tax detectability you get with the traditional IRA. In exchange, the IRS allows you to withdraw money from your Roth IRA without taxes when you retire. That can be a very valuable option, especially if you are a younger worker. The money in the Roth IRA can accumulate and grow for decades, building a significant nest egg you can draw on with no tax consequences.
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Current Tax Bracket
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The higher your current tax bracket, the more valuable the deduction for a traditional IRA can be. If you are in a high tax bracket now and expect to be in a lower one when you retire, a traditional deductible IRA can be a wise choice. But if you are currently in a low tax bracket, the value of that tax deduction diminishes quite a bit. If you are currently in the lowest tax bracket, you could very well be in a higher tax bracket when you retire. That argues in favor of a Roth IRA, since the money you pull out in retirement is not subject to tax.
Other Retirement Assets
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If you have a significant amount of retirement savings outside your IRA accounts, you should strongly consider using the Roth option for your IRA funds. If you have a high balance on your 401k, as well as personal savings and other assets, the amount you can draw in retirement could put you in a tax bracket equal to, or even higher than, what you have now. That means that the tax benefit you get from a deductible IRA is less than the tax benefit of being allowed to take the money out tax free when you retire.
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