Which is Better, ROTH or Traditional IRA?

We are assuming you are familiar with the contribution rules and tax differences between a ROTH and Traditional IRA.  If not, click on the links to learn more. 

Both the traditional IRA and ROTH have benefits over a non-qualified investment.  They are both good, it is a matter of choosing which will be better for you.  However, do not contribute anything you expect to need soon.  If you withdraw from your IRAs before age 59 ½ there may be a penalty.  However, the penalty can usually be avoided with planning.

The net difference between ROTH and Traditional is the difference between your tax rate now and your tax rate when you take your withdrawals.  In general, the younger you are and the lower your tax rate now, the better ROTH will be for you.  As a rule of thumb, in the current 2022 tax environment, if you are under 30 OR in or below the 12% tax bracket (Under 109,450 married filing joint or under $54,725 filing single with standard deduction) I would lean towards ROTH.  If you are in or above the 22% tax bracket (Over 109,450 married filing joint or over $54,725 filing single with standard deduction), I would lean towards a traditional IRA.

There could be some nuanced situations where it makes more sense to go one over the other that don’t have much to do with taxes.  For example, if you may need to use these funds as an emergency fund, you can withdraw from a ROTH IRA your contributions after 5 years without a penalty.  Alternatively, it may make sense to contribute some to a traditional retirement plan, and some to a ROTH.  This will allow you to control your taxes more easily in retirement.  You could take regular income from your traditional and larger expenses from your ROTH, this will keep your tax rate levelized.

As of the time of this writing, the back door ROTH is still a viable option. This is simply contributing to a traditional IRA, not getting the deduction due income limitations, then converting the traditional IRA to ROTH.  There are some nuances with the back door ROTH, and it may soon be legislated away.

This is a complicated topic, with a lot of nuance, numbers, asterisks, and opportunities.  If you would like to set up a time for a complimentary consultation with Wisdom Wealth Care, give us a call or email and we can talk about your personal situation.  The best time to start was 20 years ago, the second best is now.