Should I Contribute To My Roth IRA Vs. My Traditional IRA?

When saving for retirement, you may be wondering whether you should make contributions to a traditional IRA or a Roth IRA. The answer to this question depends on several factors that should be considered carefully.

Firstly, it is important to consider your eligibility to deduct contributions to a traditional IRA. If you are eligible, contributing to a traditional IRA may provide a current tax deduction, which can reduce your current taxable income.

Secondly, you should consider your eligibility to make contributions to a Roth IRA. If you are eligible, contributing to a Roth IRA can provide tax-free growth and withdrawals in retirement, which can be advantageous for those who expect to be in a higher tax bracket in retirement.

Another important factor to consider is your current tax rate versus your future tax rate. If you expect your tax rate to be lower in retirement, contributing to a traditional IRA may be more advantageous. However, if you expect your tax rate to be higher in retirement, contributing to a Roth IRA may be more beneficial.

It is also important to consider your ability to max out contributions. If you are able to max out contributions to both a traditional IRA and a Roth IRA, it may be beneficial to do so in order to take advantage of the tax benefits of both accounts.

Finally, it is important to consider the impact of required minimum distributions (RMDs). Contributions to a traditional IRA are subject to RMDs in retirement, which can increase your taxable income and potentially push you into a higher tax bracket. Roth IRAs, on the other hand, are not subject to RMDs, which can provide more flexibility in retirement.

In summary, deciding whether to contribute to a traditional IRA or a Roth IRA depends on your individual circumstances and requires careful consideration of eligibility for deductions and contributions, current and future tax rates, ability to max out contributions, and the impact of RMDs.

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Robert J. Pyle, CFP®, CFA, AEP® founded Diversified Asset Management, Inc., in 1996 to provide personalized, comprehensive wealth management services to successful individuals, families, single women, and business owners. His specialty is addressing the complex financial needs of self-employed professionals, corporate executives, and small-business owners. Our disclosure can be found here. The views, opinion, information, and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc. Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting, or tax advice.