Advertisement
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.

Advertisement - Article continues below

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.

Advertisement
Advertisement

Most Popular

Election 2020: Joe Biden's Tax Plans
taxes

Election 2020: Joe Biden's Tax Plans

With the economy in trouble, tax policy takes on added importance in the 2020 presidential election. So, let's take a look at what Joe Biden has said …
September 18, 2020
11 Dividend-Paying Stocks You Should Think Twice About
dividend stocks

11 Dividend-Paying Stocks You Should Think Twice About

Dividend-paying stocks often can be a store of safety, but 2020 has been difficult on income equities. These 11 picks look like shaky plays despite th…
September 21, 2020
Medicare Basics: 11 Things You Need to Know
Medicare

Medicare Basics: 11 Things You Need to Know

There's Medicare Part A, Part B, Part D, medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare --…
September 16, 2020

Recommended

HSA Limits and Minimums
health savings accounts

HSA Limits and Minimums

Annually adjusted contribution limits and other requirements must be met if you're covering health care costs with a Health Savings Account.
September 21, 2020
Don’t Be Paralyzed by Uncertainty
retirement planning

Don’t Be Paralyzed by Uncertainty

You definitely need a plan, because what’s ahead could be scarier than what’s behind us.
September 21, 2020
Insurance for Long-Term Care at Home
retirement

Insurance for Long-Term Care at Home

In the wake of COVID-wracked nursing homes, increasingly more people are looking at options to age in place with long-term care insurance.
September 17, 2020
Medicare Basics: 11 Things You Need to Know
Medicare

Medicare Basics: 11 Things You Need to Know

There's Medicare Part A, Part B, Part D, medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare --…
September 16, 2020