Which IRA Is Best for Me -- Traditional or Roth?

By Dan Caplinger Markets Fool.com

One of the toughest choices retirement savers face is whether to go with a traditional IRA or a Roth IRA. Both have their advantages and disadvantages, and both can serve a valuable role in your overall retirement planning. By taking the following factors into consideration, you'll be better equipped to figure out which IRA is best for you.

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The fundamental difference between traditional and Roth IRAs

The biggest difference between traditional IRAs and Roth IRAs is in how they get taxed. Traditional IRAs offer most taxpayers an up-front tax deduction on the amount they contribute. This results in immediate tax savings in the year in which you make the traditional IRA contribution, and because you have until the tax-filing deadline the following year to make a contribution to an IRA for a given tax year, many taxpayers make last-minute deposits to traditional IRAs in order to get a much-needed tax break. Roth IRAs don't offer an up-front tax deduction, forcing you to use after-tax money to make your contributions.

However, the tax benefits of the two accounts flip in retirement. Traditional IRAs aren't as favorable in retirement, because you have to include any withdrawals in your taxable income for the year in which you take them. Roth IRA withdrawals are usually tax-free, so they have no impact on your taxes in retirement. In other words, with a Roth IRA, what you see as your account balance is what you'll be able to spend, while traditional IRAs are somewhat inflated, because you'll lose some of your nest egg to taxes when you pull it out of the account.

The Roth can be, but isn't always, the better IRA option. Image source: Getty Images.

Do you want to be forced to take withdrawals in retirement?

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Another difference between traditional and Roth IRAs is the way they handle required minimum distributions. Traditional IRAs typically make you take withdrawals as soon as you reach age 70-1/2, and the amount of those withdrawals is based on your life expectancy. If you don't take those withdrawals, you'll owe the IRS a penalty equal to 50% of the amount you should have withdrawn. Roth IRAs don't have this requirement, allowing you to keep money in the Roth as long as you want. That can be particularly useful if you're using your retirement account assets for estate planning, because stretch IRA strategies can extend the tax-free treatment of Roth IRAs for generations beyond your death.

Does your income prevent you from having the IRA you want?

There are income limits above which taxpayers aren't allowed to make contributions to a Roth IRA. A phase-out range exists in which you can contribute only a portion of the maximum that most savers can contribute, which in 2017 is $5,500 for those under age 50 or $6,500 for those 50 or older. You can see the income limits below.

For this filing status...

...contributions are reduced if income is above this amount...

...and contributions are not allowed if income exceeds this amount

Single, head of household, or married filing separately ifyou didn't live with your spouse during the year

$118,000

$133,000

Married filing jointly or qualifying widow or widower

$186,000

$196,000

Married filing separately ifyou lived with your spouse at any point during the year

$0

$10,000

Data source: IRS.

For traditional IRAs, there's no income limit on contributions; you're always allowed to deposit the full contribution amount. However, you might not be able to deduct your contributions from your taxable income if you or your spouse is covered by an employer-sponsored retirement plan at work. Below are the income limits that apply in this case:

Tax Filing Status

Limits If You're Covered

Limits if Your Spouse is Covered but You're Not Covered

Single or Head of Household

$62,000 to $72,000

N/A

Married Filing Jointly

$99,000 to $119,000

$186,000 to $196,000

Married Filing Separately

$0 to $10,000

$0 to $10,000

Source: IRS.

The key to the smart IRA decision

In the end, you want to pay the least amount in tax possible. Try to determine whether your current tax rate is higher or lower than what your tax rate will be in retirement. Obviously, that's a tough thing to guess, especially if retirement is years or even decades away. However, those who are in low tax brackets now should look more closely at Roth IRAs, because the deduction from a traditional IRA isn't worth all that much for low-bracket taxpayers. By contrast, those who are in high brackets, and can thus benefit greatly from a deduction now, should look more closely at traditional IRAs.

Both types of IRAs are powerful retirement saving tools, and either would make a good choice for most retirement savers. By considering the issues above, however, you'll be more likely to pick the IRA that works best in your particular situation.

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