I'm researching IRA's,is it better to take the tax ded. in a reg IRA or will I get a better return with a Roth

Question

I'm 37 and trying to figure out whats best for me. Get a tax deduction for contributing to a reg IRA or take a chance and get a decent return having paid the tax and contribute to a Roth?

Answer 1

I do returns for a large number of seniors living on funds from their IRAs that surely wish they had ROTH IRAs. It is not uncommon for them to be in a higher tax bracket now than when they earned the money that is in the IRA. If you are looking to the future you should do ROTH IRAs. If you are trying to survive the present do traditional IRAs.

Answer 2

A Roth, by far. With a pre-tax IRA, you get to deduct $2,400 from your taxable income this year, which will save you about $600 next April 15. With a Roth IRA, you don't deduct from this year's taxes, but all of the money you cash out 40 years from now is tax-free. That'll be a lot more than $600.

Answer 3

I am only aware of one situation in which a Roth IRA is not the better option. As I read the rules, you can't contribute to a Roth IRA if your income exceeds certain limits. I don't see income limits for contributing to a traditional IRA. The deduction is eliminated at some point, but I believe you can still contribute.

Answer 4

The deducibility of a Traditional IRA is based on your income I beleive. If I could do over, then I would have only a Roth - it wasn't invented when I started saving for retirement about 15 years ago. Now, I only contribute to a Roth simply because it will not be taxed when withdrawn in the distant future. To lower my taxes (lower taxable income amount), I use the 401(k) (contribute as much as possible) and may put one or two month's contribution into the Traditional just to see what it does on my taxes - usually lowers them a tiny bit more but the other 10 months I contribute to my Roth. During your research, make sure to pay close attention to what it will cost you to invest. It will be listed as total Expense Ratio (anything over .75% [point seven five per cent] is too much) which includes management fees, adminstration fees, 12b-1 fees (marketing), etc. Even small amounts like 1%-2% over 30 years can add up to huge amounts. If you're not sure what to invest in, you could not go wrong with one of the dated retirement funds also called Target Retirement funds. Vanguard and T. Rowe Price have them and they are completely diversified (holding many types of stocks including international and bonds) and are designed to be somewhat aggressive starting out (since there's the long expanse of time) and then become gradually more conservative as the year arrives. Since you will be retiring in 2037, you could choose Target 2035 or Target 2040. I realize that it's a small headache to fill out the paperwork to get started but it must be done. Social Security won't be there when you retire. The Baby Boomers will have consumed it and Medicare too. Remember, there's no such thing as a Retirement Loan. Good Luck!

Answer 5

Both are great options which is why I would recommend doing both. Assume you make $5,000 at a 20% tax rate. Under a Traditional IRA you would put $5,000 into the plan and under a Roth you would put in $4,000 (the $5,000 after paying taxes). 30 years of similar contributions later, you take the money out with the Roth tax fee and the traditional subject to taxes. The amount of cash in your pocket 30 years from now will be the same. The factors that would make the situation not the same:
1) Taxation of traditional IRAs changes- not likely, but a possibility
2) Taxation of Roth IRAs 30 years from now- same as #1, but always a possibility
3) Higher tax rates in the future - VERY likely. In which case the Roth is appealing because it avoids the higher tax
4) lower tax rates upon retirement- possible if you are in a high bracket now and will be living off of an IRA upon retirement.
5) unlimited cash supply that allows you to put $5,000 in the example above. The difference is $1,000 of income that would have gone into your savings account is in a Roth instead- this is a benefit.

People may try to sell you on other or the other but as mentioned in my opening statement, assuming things stay the same, both are equal. You may want to consider splitting your investment between the two, which lowers the risk of choosing one plan that doesn't optimize your earnings. It also prevents you from maximizing your cash flow but I tend to recommend conservative options.

Answer 6

Most folks will do better with a Roth IRA. If you're young (and at 37, you darn sure aren't old!) a Roth is a hands-down winner. If you're nearing retirement age a traditional IRA may be better especially if your current income is relatively high in comparison to what you will need in retirement.

Answer 7

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Answer 8

Depends on your tax bracket, cash flow, etc.

I just met with my financial planner and she suggested we contribute equally to my IRA and my husband's ROTH. Your situation could be different.

Seek the advice of a tax consultant or financial planner because your finances are unique to you.