Pure’s Senior Financial Advisor, David Cook, CFP®, AIF®, breaks down Roth and Traditional IRAs to help you navigate the nuances between these retirement accounts and identify which works best for you.
Transcript
If you ever tried to figure out the difference between a traditional IRA and a Roth IRA and which one you should actually be using, you’re not alone. It’s a common question and for good reason. The choice you make can have a real impact in how much you retirement savings you get to keep.
Today I’m gonna break down both options in plain language so you can start to see which one might make the most sense for your situation. So let’s start with the traditional IRA. When you contribute to a traditional IRA, those contributions may be tax deductible, meaning they can lower your taxable income.
Today, your money then grows tax deferred, so you’re not paying taxes on your gains year over year. The trade off. When you start taking withdrawals in retirement, that money is taxed as ordinary income. You’ve essentially made a deal with the IRS. I’ll pay you later. And speaking of later, once you turn 73, or in some cases 75, the IRS requires you to start taking what are called required minimum distributions or RMDs each year, whether you need the money or not.
The traditional IRA tends to be a strong fit if you’re in a higher tax bracket today. Then you expect to be in retirement. You get the deduction when it’s worth the most. Right now, the Roth IRA flips that equation entirely. With a Roth, you contribute money that’s already been taxed, so there’s no upfront deduction.
But here’s the payoff. Your money grows completely Tax free and qualified withdrawals in retirement are also tax free. You’ve made the opposite deal with the IR risk. I’ll pay you now and we’re done. Think of it like this. A Roth IRA is like paying tax on the seed and not the harvest. There are no required minimum distributions during your lifetime either, which gives you a lot more flexibility in how and when you access your money and makes a Roth a powerful tool for passing wealth onto your air.
One thing to keep in mind. Roth IRA contributions are subject to income limits, so depending on where your income falls, you may be eligible for a full contribution, a partial one, or none directly. If you’re choosing a Roth option inside your work, sponsored 401k plan, those income limitations are generally removed.
The Roth tends to shine if you expect to be in a higher tax bracket in retirement. Than you are today, or if you simply value the peace of mind of tax free income down the road, if you think taxes will be lower for you in retirement, the traditional IRA’s upfront deduction is valuable. If you think taxes will be higher or you’re just not sure, the rock’s tax free growth really looks very attractive.
Now, here’s a helpful rule of thumb from our ultimate IRA guide. If you’re not sure what tax bracket you’ll be in later in life. Consider keeping your retirement savings tax diversified, meaning you have some money in accounts that’ll be taxed in retirement, and some of that won’t be That way you have flexibility no matter what the tax environment looks like when you get there.
For many pre-retirees in the late fifties and early sixties, this window right now can actually be a smart time to evaluate a Roth conversion. So this is where you move your money from a traditional IRA into a Roth, and there is no limits on how much you can convert. There is no income restrictions. Now, it’s not right for everyone.
It’s absolutely worth a conversation though at the end of the day, there’s no universally best IRA, but there is best one for you based on your income, your goals, and where you’re headed in retirement. If you wanna go deeper, please don’t hesitate to reach out. We are here to help make the most of every dollar you’ve worked so hard to save contact Pure for a free financial assessment.
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- Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC, a Registered Investment Advisor.
- Pure Financial Advisors LLC does not offer tax or legal advice. Consult with your tax advisor or attorney regarding specific situations.
- Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
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- Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
AIF® – The AIF® designation, administered by the Center for Fiduciary Studies fi360, certifies that the recipient has specialized knowledge of fiduciary standards of care and their application to the investment management process. To receive the AIF Designation, the individual must meet prerequisite criteria based on a combination of education, relevant industry experience, and/or ongoing professional development, complete a training program, successfully pass a comprehensive, closed-book final examination under the supervision of a proctor and agree to abide by the Code of Ethics and Conduct Standards. Six hours of continuing education is required annually to maintain the designation.
CFP® – The CERTIFIED FINANCIAL PLANNER® certification is by the CFP Board of Standards, Inc. To attain the right to use the CFP® mark, an individual must satisfactorily fulfill education, experience and ethics requirements as well as pass a comprehensive exam. 30 hours of continuing education is required every 2 years to maintain the certification.
