Which IRA is better, Roth or Traditional?

Question

I have heard that it's good to invest in both the 401K and an IRA. Right now I have the 401K down but need some advise regarding a Roth or Traditional IRA. I'm not exactly sure which would be better to invest in. I would be doing a joint investment with my husband. What are the differences between the two? Any impute would be greatly appreciated!

Answer 1

Unless the rules have changed, if you invest in a 401k you can not also invest in a traditional IRA. You can invest in a Roth IRA. The differences between the two is that after tax money goes into a Roth IRA, before tax money goes into a traditional IRA same as a 401k. All money earned by a Roth IRA is tax free for ever. All money removed from a traditional IRA is taxed.

In my opinion it is much better to invest in a Roth IRA than a traditional IRA because of the tax treatment of withdrawals. But a lot depends on your tax bracket. All money withdrawn from a Roth IRA is tax free. All money withdrawn from a traditional IRA and a 401k is taxed completely at the full tax rate.

Let us assume that you have invested for 40 years into a 401k or a traditioanl IRA and you have over $2 million in the accoun earning 200,000 a year. You will have to withdraw at least $250,000 a year at age 70 1/2. You may be paying 33% tax rate on the withdrawals. Not good.

Answer 2

Roth IRA is much better. For example if you are 29 and invest $3000 a year into a traditional ira your contribution is tax deductable. If you are in a 33%(Federal&State combined) tax bracket you would have $1000 of tax savings a year and when you reach 59 1/2 you would have a total of $30,000 tax savings not paid to the IRS. Sound good. Let's say you got an average of 12% (typical mutual fund average)on the money you invested it would now have a balance of about $500,000. If you did not want to deplete the money and make it last you would have to withdraw the interest that this amount your earning. Let's say you are getting 10% which would mean your withdrawing $50,000 a year without depleting the retirement account. If taxes stay the same and don't go up 33% of that money would have to be paid to the IRS or about $15,000. In 2 years of retirement you pay back 30 years of tax savings. Imagine if you lived to 89 you would have ended up paying $450,000. How does that make you feel? What if you invested $3000 a year into a ROTH IRA. A ROTH IRA is different and allows to take out your money tax free during retirement because you fund it with after tax dollars. You would get to withdraw your $50,000 a year and not pay a dime of taxes. The catch is you don't get $1000 a year in tax savings. These are called qualified plans because they are qualified with the IRS. Do you want Uncle Sam planning your future. I would say a ROTH IRA is definitely much better because it provides you with more money at retirement which is the whole plan of setting up a retirement account anyway. It's not about how much interest your earning but how much interest your earning after taxes that really makes the difference. Also for the majority of people find themselves in a higher tax bracket when they retire for several reasons such as the mortgage is paid off and their kids have moved out of the house. This is your life and retirement plan and is something you should consider very carefully and research very thoroughly. I hope this helps!
Aloha

Answer 3

It is a bit tricky to figure which is better. With a Roth IRA there is no tax savings at the start. How much would that savings have earned over your lifetime if you had gone with the traditional? Is the loss of that savings offset by the tax a traditional IRA pays at the end? You may want to make a spreadsheet and see. Much depends on your tax bracket and years until retirement. Also I don't think you can convert a 401k to a Roth IRA without paying all the tax at transfer time.

Answer 4

Well, if you are already contributing to a 401(k), you cannot get a deduction for contributing to a traditional IRA, which defeats the benefit of the traditional IRA over the Roth IRA (a current deduction for your contribution). From a tax standpoint, your best option would be to max out your 401(k) if you are not already doing so. If you are already maxed out on your 401(k), that is you are already contributing the annual limit of $15,000, then you could consider making a nondeductible contribution to either a traditional or a Roth IRA. Only the earnings in the IRA account will be taxable when you withdraw it.

Answer 5

It will depend on your tax situation. If you actually make enough to pay income taxes (not just payroll) then a traditional may be better. Do you itemize on your taxes? If not, you may not have enough deductions, even with the IRA contribution. Talk to your tax advisor.

If taxes aren't an issue, then the Roth would be the better choice. While it doesn't provide a tax deduction now, the proceeds will be tax free upon retirement, unlike the traditional, which will be taxed.

Max out your 401k before you do either of these.

Answer 6

everyone already has given you the answer to the traditional vs. roth, so the only thing I need to point out is that you CANT do a joint investment with any type of IRA. The 'I' stands for 'individual' & therefore, you cant have a joint person on it. You can only have a beneficiary.

Answer 7

Roth IRAs are best if you are not making much money, and don't need a tax deduction. Roth IRAs can often be done in addition to other retirement accounts.

Traditional IRAs are best if you need a tax deduction for the the year you are contributing to them.

Answer 8

Depending upon your income and tolerance for current taxes, as a general rule the ROTH is. ROTH - Income you get is tax free, but you get no break on taxes when you invest in them. Traditional IRA - Income that you get from them at retirement is taxed (presumably at a lower rate than when you were working); but you get a credit on pre-tax dollars in the current year.

Answer 9

Key is what you put in the IRA as investment. Roth likely better but if you don't invest well outside of banks & annuities & the like both are bad. ADX PEO 2 classic holdings.

Answer 10

Traditional - Tax benefit on the front-end. Contributions are deducatable but the withdrawls are entirely taxable when taken out.

Roth - Tax benefit on the back-end. Contributions are not deductable but all withdrawls are tax-free assuming the condtions are met.

Since you are convered by a 401k at work, you may not be able to do a deductable tradtional. The income limits are a bit low.