Roth IRAs vs Traditional IRAs: Which is best for You?

Should you stick with Tradition or Invest in a Roth IRA?

You may be wondering if you should stick with the tried and true "traditional" IRA or if it makes better sense to invest with a Roth IRA.

Roth IRAs offers investors a unique, tax-advantaged way to save for retirement. Although contributions are not tax deductible, withdrawals are tax-free - as long as they are made after age 59 ½ and after the account has been in existence for at least five years. This allows your earnings to compound free of taxes with no future income tax consequences. The maximum yearly contribution for Roth IRAs is phased out at adjusted gross income (AGI) levels of $95,000 to $110,000 for single filers and $150,000 to $160,000 for joint filers. Of course, Roth IRAs may not be suitable for all investors - you'll need to consider your own personal financial situation.

What is Right for You?

When you invest through a Roth IRA, you are exchanging the potential annual tax deduction offered by traditional IRAs for tax-free withdrawals offered by the Roth IRA. Is it worth it? That depends on a number of factors:

Time horizon: If you are eligible for a deductible traditional IRA, you'll need to consider how many years you have until you'll need the funds in the account. If you can postpone withdrawals for at least five years and you will be at least 59 ½ when you withdraw the money, a Roth IRA may be right for you. If you plan on using the money before then, however, you may end up with more income by deducting your contributions and reinvesting your tax savings.

Deductibility: If you are covered by an employer-sponsored retirement plan, deductibility for contributions in a traditional IRA gradually phases out, starting at $31,000 for singles and $51,000 for joint filers (1999 thresholds). If you can ™t deduct your IRA contributions, then you ™re not losing anything by choosing to invest through a Roth IRA.

Future tax bracket: If you anticipate dropping to a lower tax bracket at retirement, your distributions will be taxed at a lower rate. This lower rate, along with possible deductibility in a traditional IRA, could make a Roth IRA less advantageous.

Should You Convert?

If you have an AGI of $100,000 or less, you can convert an existing traditional IRA to a Roth IRA. However, you'll have to pay ordinary income taxes on the conversion as if you had taken a full distribution from your traditional IRA.

It ™s best to pay the conversion taxes out of pocket. This will allow the opportunity for more money to continue to grow and compound tax deferred inside the IRA. Plus, if you pay the taxes with money from your traditional IRA, the amount used to pay the taxes will be subject to the 10% early withdrawal penalty. By paying the taxes out of pocket, you avoid the 10% penalty.

Generally speaking, converting makes the most sense if you are several years from retirement, you expect to be in an equal or higher tax bracket at that time and you won't need to withdraw money until after age 59 ½ . Remember, the Roth IRA will need enough time for its tax-free earnings to build and outweigh the cost of paying the conversion taxes.

Consider Your Personal Situation

To determine whether a Roth IRA or a traditional IRA is best for you, you may need to run the numbers. Your investment professional can help you make a comparison and help you decide which alternative is best for your individual situation.

Contact Atlantic Financial

For more information or to have us answer any questions you may have, please call 1-800-559-2900, or use this form to contact us:

Back to the top of the Roth IRA vs. Traditional IRA page

Financial Planning and Investment Services

Atlantic Financial has been serving clients since 1994. Atlantic Financial enjoys a solid reputation for service, selection and value. We can review your wealth management plan, assist with your or 401k / IRA Rollover and assist you with global wealth management.

Individual Services

Institutional Services

Company