Choosing the IRA that’s Right for You

We’ve probably all seen the commercials with the green line on the floor that leads people in the direction of saving money by investing in their 401(k) or establishing an Individual Retirement Account (IRA). Perhaps you’re trying to create your own line without the built-in GPS program and need some answers to get started. Taking advantage of any employer-sponsored program, like a 401(k) is a great place to start, especially when your employer offers a match. Supplement this plan by considering a Traditional or Roth IRA, or even both.

Deciding between the two IRA options often depends on what you forecast your future tax situation will look like. Do you anticipate being in a lower tax bracket today or during retirement, which the IRS says can begin as early as age 59½? Depending on how you answered that question, consider these trends to help you make a decision:

People opening a Traditional IRA believe they will be in a lower tax bracket in retirement. A traditional IRA offers them the chance to defer paying taxes on the money saved through a tax deduction now (which is predictably at a higher tax rate, remember). Taxes are then paid when you withdraw the funds during retirement. So, essentially, when it works, you pay less in taxes and keep more money in your own pocket. Here’s a hypothetical: Nancy is 45 years old, married and makes an annual income of $60,000. She chose a Traditional IRA because she deducts the entire contribution on her tax return.  

Conversely, people who open a Roth IRA often believe their current tax rate is lower than what their tax rate will be in retirement. The contributions they make to their Roth IRA have already been taxed. As a result, they can take tax-free distributions during retirement. Here’s another example: Rick is 38 years old, single and makes an annual income of $46,000. He chose a Roth IRA because he wants to be able to take tax-free distributions at age 59½.

Of course, if you’re unsure of how to answer that question, you can always consider both. Keep in mind there are some stipulations as to the amount that can be contributed each year, and not everyone is eligible to make contributions. Factors that affect your eligibility include your age and your income-level. If you decide to open both, contribution amounts are aggregated and cannot exceed the contribution limit for the year. Consider one more example: Jesse is 51 years old, married and makes an annual income of $38,000. In 2012, he chose to contribute $3,000 to a Traditional IRA and $3,000 to a Roth IRA for a combined amount of $6,000, which was the contribution limit that year.

Deciding which IRA to use is something you should talk over with a financial advisor who can provide you with expert advice about the different variables and advantages to using one or both accounts depending on your financial situation. Contact an Affinity Plus Member Advisor today to begin navigating an individualized plan to get you successfully through your retirement.