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How to Choose Between a Roth or Traditional IRA

Howard Hook, CFP®, CPA, published in NJMoneyHelp on September 21, 2015

The Question: I’m trying to decide between a Roth and a traditional IRA. My income means I can deduct the traditional one, but I’m not sure. How can I decide?

The Answer: The lure of tax-free income in retirement is a big one, but so is getting a tax deduction you can use today.

The decision between a Roth IRA contribution and a traditional IRA contribution comes down to whether or not you will be in a higher tax bracket when you need the funds, said Howard Hook, a certified financial planner and certified public accountant with EKS Associates in Princeton.

Hook said If you will be in a higher tax bracket in the future, then the Roth IRA contribution makes more sense. If you expect to be in a lower tax bracket in the future, then the tax deductible IRA contribution makes more sense.

“One caveat would be that trying to predict future tax rates may be difficult to do,” he said.

Michael Maye, a certified financial planner and certified public accountant in Gillette, said if you are in a relatively low tax bracket — 15 percent or lower — the current tax deduction won’t have as much impact as it would have for someone in the 39.6 percent marginal tax bracket.

He agrees with Hook in that if you expect to be in a higher tax bracket down the road, the Roth IRA may make more sense.

“The Roth IRA offers many advantages over a traditional IRA such as no Required Minimum Distributions when you reach 70.5 years old and tax-free withdrawals if rules are followed,” he said. “The price of admission to the Roth IRA is the lack of an income tax deduction on the initial contribution.”

If you want the best of both worlds, both Maye and Hook say you could split your contribution and put half in a Roth and half in a traditional.

“Just remember to stay within the 2015 IRA contribution limits for 2015 — $5,500 under age 50,” Maye said.