Question: Which type of IRA -- a Roth or traditional one that allows me to deduct my contributions up front -- will be better for me if I'm retiring in a few years?
Answer: Part of your decision should be based on what you think will happen to your tax rate by the time you withdraw the money. If you believe your current rate is higher than it will be when you take withdrawals, then you may want to consider taking the tax deduction now (if you qualify to deduct your contributions) and paying the taxes when you tap the account in retirement. But there are several factors that could make it worthwhile to forgo the tax break today in favor of taking tax-free withdrawals from the Roth IRA later.
1. With the new tax law, tax rates are particularly low now but may rise in a few years. Also, if most of your retirement savings is in tax-deferred traditional IRAs and 401(k)s and you'll need to take a lot of money from those accounts in retirement, then your tax rate may be higher than expected even after you stop working. Having some money in a Roth gives you tax diversification of retirement income.
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2. Withdrawals from a Roth aren't included in the calculations to determine whether you're subject to the Medicare high-income surcharge. This surcharge raises your Medicare Part B and Part D premiums if your adjusted gross income plus tax-exempt interest income is more than $85,000 if single or $170,000 if married filing jointly. For more information, see What You'll Pay for Medicare in 2018.
3. Roth withdrawals also aren't included in the calculations to determine whether a portion of your Social Security benefits are taxable. For more information, see Do You Have to Pay Taxes on Social Security Benefits?
4. Roths have no required minimum distributions, so you can keep the money growing in the tax-advantaged account even beyond age 70½.
5. Your heirs can inherit any money remaining in a Roth free of any income tax.
There's no age limit to contribute to a Roth (you have to be younger than 70½ to contribute to a traditional IRA). But, as with any IRA, you will need earned income to contribute to a Roth. Even if you only work part-time or earn some money from consulting, you can contribute up to the amount of your earned income for the year, with a maximum of $6,500 in 2018 for people age 50 and older. If you retire but your spouse is still working, your spouse can make IRA contributions on your behalf. You can withdraw your Roth contributions without penalty or taxes at any age, even before age 59½.
For more information about the income limits to contribute to a Roth or to a tax-deductible IRA, see the IRS's IRA Contribution Limits page.
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