Roth or traditional IRA: Which is best for you?

If you begin putting away $5,000 per year in a traditional IRA at age 45 and don’t start taking withdrawals until you’re 67, you’ll have more than $178,000 when you retire.

This assumes a 4 percent average return on your investment. And, don’t forget, your taxable income will be $5,000 less each year for 22 years.

If you’re able to start 10 years earlier when you’re 35, the total would grow to more than $326,000 – double that if your spouse is also able to contribute the maximum amount each year.

Of course, when you begin to take distributions, you will pay tax on both the money you contributed and the earnings on your investment. But your tax bracket could be lower in your retirement years.

If you have a Roth IRA, you won’t be able to make tax-deductible contributions. But, when you retire, your distributions – both your contributions and the earnings – will not be subject to taxes. That assumes that you opened the account five years prior.

Assuming a combined federal and state tax rate of 33.8 percent on the $5,000 and that these taxes paid reduce your Roth IRA contribution to approximately $3,310 per year, if you started saving at age 45, you will have nearly $118,000 with no taxes due if you wait until 67 to begin receiving distributions. If you’d started 10 years earlier, you would have nearly $216,000 available to you.

This is a hypothetical example used for illustrative purposes only. It does not represent any specific investment.

Clearly the choice of which IRA is best will depend on a number of factors:

  • Will your tax bracket be higher or lower when you retire than it was during the years you worked?
  • Will you be able to contribute as much in after-tax dollars to a Roth IRA as you would be able to contribute to a deductible traditional account?

Or, it may be that you will want to split your contributions between the two types of IRAs. The choice takes thought and planning.

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