Dear Garden State Trust:
Which is better, the traditional IRA or the Roth IRA?
There is no simple answer to your question, unfortunately. The traditional IRA offers an immediate income adjustment and savings in federal and state income taxes. Taxpayers who are short on cash may need the deduction to be able to make a full $5,500 IRA contribution ($6,500 for those 50 and older). The income adjustment also may affect eligibility for other tax credits.
The downside for the traditional IRA is that all retirement withdrawals are fully taxable as ordinary income, even long-term capital gains. If one is in a lower tax bracket in retirement, this may not be a concern, but future tax brackets are unpredictable. What’s more, distributions from a traditional IRA are required once one reaches age 70½. Taxable IRA distributions also may increase the taxes on one’s Social Security benefits and one’s Medicare premiums.
These potential tax traps are avoided with the Roth IRA, as all distributions will be fully tax free after age 59½, provided only that the account has existed for five years. There are no required minimum distributions. A Roth IRA may be an especially good choice for a bequest, as tax-free distributions may be spread over the beneficiary’s lifetime. (Estate taxes will be due on the Roth IRA in very large estates.) The difficulty with the Roth IRA is that the hit to one’s cash flow is more severe without the current deduction.
These tax considerations, although significant, are less important than making a full contribution to one or the other IRA form early in one’s career. The more time that one is invested in the market, the better the odds of having a financially secure retirement.
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