Traditional vs. Roth IRA: Which Is the Better Choice?

<< Articles
Traditional vs. Roth IRA: Which Is the Better Choice?

When it comes to contributing money to an individual retirement account (IRA), you have two main options to consider: Traditional or Roth.

Both kinds of IRAs have the same contribution limit—$5,500 in 2018, with an additional $1,000 “catch-up” contribution available if you’re age 50 or older. You can contribute to one type of IRA or split your contribution between the two types. While both traditional and Roth IRAs offer a tax break, the similarities stop there: They differ on everything from when you receive the tax break and income restrictions to when you must start taking distributions.

Which type of IRA makes sense for you will depend on several factors, including your income, current tax rate, expected future tax rate and long-term financial goals.

Traditional IRA

A traditional IRA provides a tax deduction on contributions for the year in which the contributions are made. So if you put $3,000 in the IRA this year and pay a 33 percent tax rate, you may receive a tax deduction valued around $1,000 on your annual tax return.

Not everyone is eligible to receive the deduction, though. Workers who don’t have access to an employer-sponsored retirement plan can receive the full tax deduction for contributions regardless of how much income they earn. But for those who are covered by a workplace retirement plan, deductions are phased out for single tax filers who earn more than $63,000 in 2018 (and unavailable to those who earn $73,000 or more) and married filers who earn more than $101,000 in 2018 (and unavailable to those who earn $121,000 or more).

You pay no tax on the investment earnings inside the traditional IRA until you withdraw the funds, at which point you will pay ordinary income taxes on all distributions.

You can start taking penalty-free withdrawals from the IRA at age 59½, and you must start taking required minimum distributions (RMDs) at age 70½. You will owe a 10 percent penalty—as well as taxes—on all withdrawals made before age 59½ unless the money is being used for specific purposes, such as a down payment on a first home or to cover a financial hardship.

Roth IRA

Unlike the traditional IRA, you receive no upfront tax break for contributing to a Roth IRA. However, your contributions grow tax-free inside the IRA and you will owe no taxes when you withdraw the savings in retirement. That means a Roth IRA may be a better choice if you expect to be in a higher tax bracket in retirement than you are today.

Roth contributions are subject to income limitations, however. The contribution limit is phased out for single tax filers with a modified adjusted gross income (MAGI) of more than $120,000 in 2018 (and completely phased out at $135,000) and married filers with a MAGI of more than $189,000 (and completely phased out at $199,000).

Contributions to a Roth can be withdrawn at any time—tax- and penalty-free. You must, however, keep records that show how much you’ve contributed. All withdrawals (including both your contributions and your earnings) can be withdrawn penalty-free starting at age 59½. Before age 59½, withdrawing any earnings will trigger a 10-percent early-withdrawal penalty and taxes—unless that withdrawal is being used to buy a first home or due to a disability.

One potentially significant advantage to the Roth: Unlike a traditional IRA—which requires distributions to begin by age 70½—you never have to take distributions from a Roth during your lifetime.

Choosing Wisely

Ultimately, you have to decide whether it’s more advantageous for you to get a tax break today or to wait—perhaps several decades— to benefit from tax-free withdrawals. Talk with your financial advisor to determine which kind of IRA makes the most sense for you based on your personal situation and goals.

If you already have savings in a traditional IRA, you may want to consider converting some of that savings to a Roth IRA by paying taxes on the converted amount in the year of the conversion. Whether that is a wise move depends on several factors—including your tax rate now versus later, the amount of the taxes you would owe on the conversion and your plans for the savings. Your advisor can also help you evaluate whether a conversion makes sense.


Prepared by WSJ Custom Studios

© 2018 BOK Financial. Services provided by BOKF, NA. Member FDIC. Securities, insurance and advisory services offered through BOK Financial Securities, Inc., member FINRA/SIPC and a subsidiary of BOK Financial Corporation. Services may be offered under our trade name, BOK Financial Advisors. NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE

All investments involve risk, including loss of principal. Past performance does not guarantee future results. There is no assurance that the investment process will consistently lead to successful investing. Asset allocation and diversification do not eliminate the risk of experiencing investment losses. Risks applicable to any portfolio are those associated with its underlying securities.

The opinions expressed herein reflect the judgment of the author at this date and are subject to change without notice and are not a complete analysis of any sector, industry or security. The content in this document is for informational and educational purposes only and does not constitute legal, tax or investment advice. Always consult with a qualified financial professional, accountant or lawyer for legal, tax and investment advice.

Read More

BOK Financial Corporation (BOKF) offers wealth management and trust services through various affiliate companies and non-bank subsidiaries including advisory services offered by BOKF, NA and its subsidiaries BOK Financial Asset Management, Inc. and Cavanal Hill Investment Management, Inc. each an SEC registered investment adviser. BOKF offers additional investment services and products through its subsidiary BOK Financial Securities, Inc., a broker/dealer, member FINRA/SIPC, and an SEC registered investment adviser and BOK Financial Private Wealth, Inc., also an SEC registered investment adviser.

Check the background of this firm on: FINRA's BrokerCheck

Investments and insurance are not insured by the FDIC; are not deposits or other obligations of, and are not guaranteed by, any bank or bank affiliate. All investments are subject to risks, including possible loss of principal. The content on this website is for informational and educational purposes only and does not constitute legal, tax or investment advice. Always consult with a qualified financial professional, accountant or lawyer for legal, tax and investment advice. NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE

PRIVACY & SECURITY – Legal Disclosures | Money Market Fund Disclosures | Privacy Policy