Traditional Or Roth IRA: Which Is Best?

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Which type of account is best for your savings?

It’s almost year-end, a time when many people are thinking about funding their IRA accounts. And let’s face it. Almost all of us should be putting aside more for retirement.

But are you stumped by whether or not you can fund an IRA? And which is best, a Traditional IRA or a Roth?

We recently spoke with Teresa Mears for a  U.S. News and World Report article about which type of IRA is best for you. (Check out the full article here.)

Here’s 7 quick things to know before year-end.

Tip #1. First of all, no need to rush. You can fund an IRA for 2016 up to April 17, 2017 (you get a few extra days because the 15th falls on a Saturday). In fact, it may be better to take your time. Roth IRA accounts have income limitations. If you make too much money, you can’t fund one, and many people won’t know how much they made until they sit down and prepare their tax return.

Tip #2. Max It Out. The maximum amount you can put into your IRA is $5,500 per year ($6,500 if you are 50 or over by December 31, 2016), not to exceed the amount of your actual earnings. You can contribute that amount to a Traditional IRA, or a Roth IRA, or split it between the two accounts.

Tip #3. Keep Rothin’ Until You Drop. Sorry! You can’t fund a Traditional IRA once you hit age 70½, but there’s no age limit on a Roth. As long as you have working income, you can still fund a Roth.

Tip #4. Double Up. Did you know you can still fund a Traditional IRA or Roth even if you are covered by a retirement plan at work? That’s right. You can fund your 401(k) plus a Roth, or a 403(b) plus a Traditional IRA, or maybe a SIMPLE-IRA plus a non-deductible IRA. Income and deduction limits may apply, so ask your financial planner or tax preparer for guidance.

Tip #5. Spouses Can Play Catch Up. Are you a stay-at-home spouse? Don’t get left behind when it comes to your retirement savings. You can still contribute to an IRA as long as your working spouse makes enough to cover both contributions. (See Stay-at-Home Spouse? 5 Ways To Not Get Left Behind For Retirement).

Tip #6. Still Young? Go Roth. As reported by Teresa in her article, a Roth IRA or 401(k) is a particularly good choice for young people just starting out in the workforce, whose lower salaries mean they wouldn’t get much of a tax deduction from a traditional IRA.  “If you’re young, you’re in a low tax bracket … you are the perfect candidate for a Roth,” I told her. “It’s going to compound forever.”

Tip #7. Easy Come, Easy Go. One of the biggest misconceptions is that Roth IRA contributions are subject to penalties when withdrawn. Actually, that’s not true. Roth contributions can be withdrawn at any time without penalty or tax. (It’s the earnings that can be subject to restrictions). So go ahead, put your money in. You can always get it out.

The Takeaway. Want more tips and insights into which IRA account is best for you? Check out our conversation with Teresa Mears of U.S. News and World Report, and her pointers on funding your IRA retirement nest egg.

 

 

About Mari Adam

Mari Adam, Certified Financial Planner™ and President of Adam Financial Associates Inc, has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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