Choosing
Between a Traditional and a Roth IRA
Many economists
project that tax rates will increase in the future, which makes the Roth IRA
the better choice for individuals who can afford to forgo the tax deduction, as
it allows them to take advantage of lower tax rates now.
For
individuals who are eligible for deducting a traditional IRA contribution and
making a Roth IRA contribution, but are unsure of which to choose, splitting
the contribution between both types of IRAs can be a good solution as it helps
the individual to enjoy the benefits of both types of IRAs.
Where do you think tax rates will be in the future, higher or lower?
With Medicare and Social Security coming under fire from the aging of the Baby Boomers, Trillion Dollar bailouts and another government run health care system, chances are pretty good that tax rates will be higher in the not too distant future.
Traditional IRA vs. ROTH IRA
Choosing
between a traditional and a Roth IRA can seem like a daunting task. However,
working with an advisor who understands IRAs and their impact on
income taxes and retirement income can help to make the choice easier. An advisor would consider areas such as:
- Eligibility: Whether the individual is eligible for a
Roth IRA contribution
- Deductibility: Whether the individual is eligible to
deduct a traditional IRA contribution
- Income tax rate now and later: The individual’s current
tax rate vs the individual’s projected tax rate during retirement , and
- Affordability: whether the individual can afford to
give up a deduction now in order to get tax-free withdrawals later.