Traditional vs Roth IRAs can be confusing. It comes down to a question of taxation...taxes now vs. taxes later - and which would be beneficial to you.


THE BEST WAY TO MAKE THAT DECISION IS TO BE WELL INFORMED!

FREQUENTLY ASKED QUESTIONS

Finding your way through the maze, can be frustrating. With that in mind, the following is a list of the most frequently asked questions:

  1. WHICH TYPE OF IRA SHOULD I CHOOSE?

    A Roth IRA always beats a Traditional IRA because it allows you to escape taxes entirely on the earnings of your after-tax contributions. A Roth is the better route if your tax bracket will stay the same or rise after you retire. Because the decision between a Roth and a Traditional IRA boils down to taxes now vs. taxes later, one big factor in choosing between the two is how your tax bracket will change over time.

  2. WHAT IF I’M OVER AGE 70.5 AND WANT TO KEEP SAVING?

    A Roth IRA is your only option. With a Traditional IRA, once you reach age 70.5, you have to start taking money out of your account and stop contributing. A Roth IRA allows you to keep saving as long as you have earned income without making withdrawals.

  3. CAN I CONVERT AN EXISTING IRA TO A ROTH?

    Converting from a Traditional IRA to a Roth IRA lets you make tax-free withdrawals later on, but gives you a big tax bill today. You must remember that you will owe income tax on all contributions to a Traditional IRA that you have made and all its investment earnings. Before you make the decision to convert, ask yourself these questions:

    • Will I fall into a lower tax bracket when I retire? (Remember to include pensions, projected investment earnings and taxable Social Security benefits)

    • Will I need the money within 5 years of conversion?

    • Will I need to tap the IRA to pay the taxes incurred from a conversion?

    • Will I be forced to sell investments and incur substantial capital gains taxes?

    • Will the extra income tax liability incurred by a conversion end up pushing me into a higher tax bracket or cause me to forfeit any significant tax deductions, credits or exemptions?

    If you have answered yes to any of these questions, do not convert to a Roth IRA. However, if you answered no to all of these questions, converting to a Roth IRA makes sense.

  4. CAN I CONVERT 401K AND PROFIT-SHARING PLANS?

    You can roll your 401K into a Traditional IRA when you leave your job and then flip that into a Roth IRA. The drawback is that you will owe taxes on the total amount rolled into the Roth.

  5. CAN I DIVERT 401K CONTRIBUTIONS TO A ROTH?

    A Roth IRA may be a better retirement investment than an unmatched 401K plan. Once you have put in as much as your employer will match, you might end up with more money by investing your next $3,000 in a Roth IRA where it will not be taxed when you withdraw it in retirement. As long as your expected tax rate in retirement is as high as or higher than it is today, a Roth IRA will give you the edge.

  6. CAN I HAVE A TRADITIONAL IRA AND A ROTH IRA?

    Yes, you can own a Traditional IRA and a Roth IRA at the same time. However, the maximum contribution rule still applies based on your annual adjusted gross income. You may split your maximum $3,000 annual contribution between the two IRA’s. There are many advantages to either type of IRA when saving for your retirement. The most important thing to remember though; THE LONGER YOU LEAVE IT ALONE, THE MORE YOU WILL END UP WITH WHEN IT IS TIME TO START WITHDRAWING!