Traditional or Roth IRA? The Best Money-Saving Choice for Your Retirement

When you have dedicated most of your adult life into working, one of your main goals aside from buying a house in a good community and providing the best for your family is to have a comfortable retirement.

Maybe you have your dream destination in mind now or maybe it is displayed on your inspiration board that you look at every morning and night, but living that fantasy means you need to save, save, save.

Traditional IRA vs Roth IRA

Perhaps now you’re also looking into the benefits of a traditional IRA or Roth IRA and which one is better for you, especially if your employer does not offer 401(k) with a company match. Traditional IRA and Roth IRA both offer a wider investment option and less expensive contribution limits than 401(k).

IRAs offer a wider investment selection than 401(k)

Also, with IRAs, you can have more control over your investments and you can look for cheaper index mutual funds and exchange-traded funds instead of just opting for what your company match offers.

Traditional IRA is a part of the Employee Retirement Income Security Act, which was made effective in 1974. The contributions made in this account are tax-deductible, making it more appealing to everyone.

Meanwhile, Roth IRA, which was created in 1997, is not tax-deductible unlike the traditional one, although the money you will withdraw is not taxed because you have already paid taxes with your contributions.

Why is Roth IRA Better?

Sure, the traditional IRA sounds promising, especially if you are optimistic that there will be lower tax rate during your retirement, but the tax deferral may not be beneficial to some – more so, if you have investments other than your retirement account, then you will be taxed annually based on your profits, including your contributions.

Tax rates are unpredictable, so opting for Roth IRA is a better choice

Early withdrawals, although discouraged, are also easier with Roth IRA because you don’t have to pay income taxes or penalty. However, in the traditional IRA, you will have to pay an early withdrawal penalty charge and you will be taxed at your current income rate.

Also, you need to withdraw required minimum distributions when you have reached the age of 70.5 in traditional IRA while in Roth IRA, you can prolong the time when you want to make a withdrawal because they have fewer restrictions. Roth IRA also allows you to make contributions even when you’re over 70.5 years old. This can help you save money for your family who can have access when you’re gone.

Tax Rates

The government tax rate will be expiring in 2025 and then it will revert to the higher marginal tax rates. Keep in mind the changes in the state tax rates, too. For example, while there is no tax in retirement accounts in Illinois, we will never be sure if this will continue.

Saving more money now may lead to a more comfortable retirement

Though you’re hopeful that the tax rates will eventually become low when your retirement comes, it is still better to save more now than to be faced with a surprising tax-rate increase in the future.

You have to make the call now and ponder if not having more café dates or spending tons of money on trendy accessories that don’t appreciate as time goes by will mean you can have a more secure future and a comfortable retirement.