Ask an Advisor: Roth or traditional IRA?
We’re excited to launch this new monthly series to feature an advisor from Bank of the West’s Wealth Management Group sharing a useful reply to a question that many of our clients have. This month Spencer Thomas answers this question:Should I invest in a Roth or Traditional IRA?
Congratulations: if you’re contemplating which IRA is best for you, you’re already ahead of the game. Most people sign up for their company’s 401(k) and never look back, but an additional IRA offers some serious benefits, including more potential savings, diversification, and flexibility for you and your family.
First and foremost, as with any investment decision, consult your tax advisor for a definitive assessment of how a Roth or traditional IRA would impact your tax situation. That said, my usual go-to is Roth — it’s better for most people — but depending on your circumstances, a traditional IRA might be the right option for you. These are the key factors to consider:
- Your income level at the time of contribution;
- Your tax rate at the time of contribution and what you think your tax rate will be when you’re ready to take the money out;
- Your current age and the age at which you think you’ll want to start withdrawing funds.
If your modified adjusted gross income is more than $200K (filing jointly), stop reading and narrow your research to a traditional IRA. The IRS rules are slightly complicated and change from year to year, but you can’t contribute to a Roth if you’re above the income limit, typically around $130K if you’re single and around $200K if you file jointly.Make an educated guess on your future tax bracket
The big difference between Roth and a traditional IRA is the timing for paying the taxes. With a Roth IRA, you pay taxes when you contribute, at your current tax rate; with a traditional IRA, you pay when you withdraw, at whatever tax rate applies at that time. Since most people’s income and tax rate is highest at retirement, Roth is usually a better choice than a traditional IRA. In addition to the lower tax rate, you pay up front and you’re done — you don’t have to worry about what tax bracket you’ll be in when you retire.
On the other hand, if you think Congress will lower taxes or your income bracket will be lower when you retire, a traditional IRA might be the better bet for you.Decide if your age matters
The year you turn 70.5, you will no longer be able to contribute to a traditional IRA. The following year, you will be required to begin distributing funds and pay the applicable taxes on a traditional IRA. A Roth IRA gives you considerably more freedom: You can continue to contribute at any age and there’s no minimum distribution requirement at any age. If you’re 69 and feeling fine, Roth gives you the option to keep contributing and hold onto the funds for as long as you like.Pick one, or both
As with most financial decisions, this isn’t one-size-fits-all, but once you know the differences and how they apply to you, either option (or both) can be a great addition to your retirement plan. We’re happy to work with you and your accountant to determine what’s best for you.
To learn more about Bank of the West’s Wealth Management Group or to find a private client advisor, click here.
Spencer Thomas is a Vice President and Senior Private Client Advisor for Bank of the West in Fort Collins, Colorado. Spencer prides himself on providing clients with a global approach to managing their assets, taking the time to understand each client’s aspirations, risk tolerance, and current business and family situation to develop the financial strategy that best meets his or her needs. A former Army reservist, Spencer loves his work, but when he’s not at his desk you’re likely to find him fishing, golfing, or spending time with his family.