retirement

Should I Save in a Roth IRA or a Traditional IRA?

Editor’s note: This is one of the 20 tough financial questions posed in the “Do This or That?” cover story in the September 2011 issue of Kiplinger’s Personal Finance.

Editor’s note: This is one of the 20 tough financial questions posed in the “Do This or That?” cover story in the September 2011 issue of Kiplinger’s Personal Finance. Use the drop-down menu above to consider other financial conundrums and the right answers for you; share your own experiences and insights in the Discuss field at the bottom of this page.

Save in a Roth IRA if you like the idea of receiving tax-free income in retirement. Roth IRAs often make sense for younger workers, who are likely to benefit from decades of tax-free growth. With a Roth IRA, you get no upfront tax break, but if you’re in a low tax bracket, that’s no great loss. And Roths offer more flexibility than traditional IRAs. You can withdraw contributions (but not earnings) anytime tax-free and penalty-free. Older, wealthier workers who like the idea of tax-free income in retirement and no mandatory distributions may also want to fund a Roth IRA. If your adjusted gross income is too high to qualify -- $179,000 if you’re married or $122,000 if you’re single -- you can contribute to a traditional IRA and then immediately convert it to a Roth IRA tax-free, regardless of your income. (If you convert a traditional IRA with untaxed money to a Roth, you have to pay tax on it.)

Choose a traditional IRA if you qualify for the upfront tax deduction -- and claiming it gives your finances a needed boost. The money will grow tax-deferred until you withdraw it in retirement. Contribution limits are the same as for a Roth IRA, but you can deduct the full contribution -- even if you participate in another retirement plan at work -- as long as your income doesn’t top $56,000 if you are single or $90,000 if you are married. If you aren’t covered by another retirement plan but your spouse is, you can deduct the maximum IRA contribution as long as your joint income doesn’t top $169,000. If neither of you is covered by a plan at work, you can both deduct the maximum IRA contribution, regardless of income. If you’re in the 25% bracket, stashing $5,000 in an IRA will knock $1,250 off your tax bill.

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