Dear Trust Officer: Which is better, the traditional IRA or the Roth IRA?
— Generous, but Prudent
DEAR FUTURE RETIREE:
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. If you are short on cash, you may need the deduction to be able to make a full $5,500 IRA contribution ($6,500 if you are over age 50). The income adjustment may also affect your 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 you are in a lower tax bracket in retirement, this may not be a concern, but future tax brackets are unpredictable. Moreover, distributions from a traditional IRA are required once you reach age 70½. Taxable IRA distributions may also increase the taxes on your Social Security benefits and Medicare premiums.
These potential tax traps are avoided with the Roth IRA, as all distributions will be fully tax free after age 59½, provided that the account has existed for at least 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 your 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 your career. The more time you are invested in the market, the better your odds are of having a comfortable retirement.
Do you have a question concerning IRAs or retirement planning? Send your inquiry to Michael S. Goldak at email@example.com