Mailbag Monday: Traditional or Roth IRA?
My husband will have a pension and an annuity through his work for retirement, but we also opened a Roth IRA for him about two years ago. I have a Traditional IRA. We currently only have the ability to put $5,000 in a year. Does it make sense to place that $5,000 in just his Roth IRA given the tax ramifications at retirement age or continue to split the $5,000 between the two? We are currently in the 25% tax bracket. My traditional IRA is valued at about $30,000 and his is near $13,000.
— Karen
Just to recap, here’s the difference: You contribute after-tax dollars to both accounts. With a Traditional IRA, you may receive a tax deduction on your contributions, but you are taxed when you pull them out in retirement. With a Roth, there’s no tax deduction today — but when you tap the account in retirement, you tap it tax-free, meaning your earnings are completely untaxed. There are other differences, aside from taxes, that are important to note, particularly as you near retirement: A Traditional IRA means required minimum distributions at age 70 ½. You may leave the money in a Roth IRA untouched for as long as you like, making it a good way to pass an inheritance if that is your goal.
So the question now is whether you want to pay taxes today, or tomorrow — and whether making a required distribution at age 70 1/2 matters to you. If the required distributions aren’t an issue — you know you’re going to need this money in retirement — then you can look squarely at the tax issue: Do you think your tax rate is lower now than it will be in retirement, or higher? If it’s lower, that argues for paying taxes on the money now, through a Roth. If it’s higher, you may want to defer taxes as long as possible and go with the Traditional IRA. Unless you strongly know differently, the Roth is usually a fantastic deal. And if you don’t think you’ll need the money in retirement because of that pension and annuity, it’s a good idea to choose a vehicle that won’t require distributions.
