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How to Know if a Roth IRA Right For You?

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How to Know if a Roth IRA Right For You?
April 17, 2018

The more cash you are able during to save during your working years, the more likely you will be able to achieve the retirement you have always envisioned! That is why many people take advantage of opening an Individual Retirement Account (IRA) in addition to contributing to their 401(k) at work.

IRA vs Roth IRA

We hear these terms thrown around: IRA, Roth IRA, 401(k), 403(b), and the list goes on and on. So what’s the difference? The simple answer is how they are treated from a tax standpoint. An IRA allows you to contribute up to $5,500 in 2018 ($6,500 if you are age 50 or older) and whatever you contribute is deductible on your taxes. The IRA can be invested in a variety of ways, from a conservative CD through a bank to a portfolio of stocks through a broker, and will grow tax-deferred until you withdraw the funds in retirement at which time you pay taxes at your current tax rate in retirement.

The Roth IRA is flipped in such a way that while you can contribute the same amount in 2018, the money you contribute now is not deductible on your taxes. Instead, the Roth IRA grows tax-free and when it comes time to withdraw the funds during your retirement years, there are no taxes to be paid because you paid them up front with your after-tax contributions.

Which Is Right For Me?

So how do you determine what the best choice is? The short answer … it depends! To elaborate, it depends on your current income as there are limits to whether you can contribute at all and whether you already have an existing employer-sponsored retirement plan such as a 401(k). For example, in order to contribute the full amount to a Roth IRA in 2018, a Married Filing Jointly couple must make less than $189,000 before the contribution amount phases out. It also depends on what your end goal is from a tax planning perspective. Are you in a higher tax bracket now than you think you will be during retirement? Then it may be better to take advantage of a Traditional IRA and take the deduction now. Do you think tax rates are currently at the lowest point they’re ever going to be? Then take advantage of the Roth and pay those taxes now so you can benefit from the tax-free growth!

Roth Conversions

If the idea of a retirement account that is free from future income taxes sounds enticing to you, but perhaps your income makes you ineligible, there are ways to still take advantage of a Roth by completing a conversion from an IRA to a Roth IRA. Whether you’ve been contributing to a Traditional IRA over the years or you have an old 401(k) that you rolled over into an IRA, you are allowed what is called a conversion. The caveat is the tax bill has to be paid upfront which can be a stumbling block for most people. However, because income taxes are lower in 2018, Roth conversions have become a popular choice since it is cheaper for those to convert their funds.

Keep in mind, however, the new tax law has made it to where conversions cannot be undone this year like they have been in the past. The best thing you can do is get advice, start planning and analyzing the outcome now, and then wait until November or closer to the end of the year, to do your conversion so you don’t have a heavy tax burden that you didn’t anticipate.

The debate can go on and on as to which is the better option concerning the IRA vs Roth IRA, but the overall message is that regardless of which type of retirement account you choose, it’s important to take action and choose something! You are working and saving now so you eventually don’t have to. Be smart, save, and reach out for advice when you need help.

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