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Should You Contribute to a Roth IRA?

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January 28, 2019

Should You Contribute to a Roth IRA?

Author: Thad Schlaud

Topics: Industry Ideas

One of the most common questions we get as financial planners is, “What kind of IRA is best for me, Roth or Traditional?”

Both accounts are powerful retirement savings vehicles, but they each have unique advantages and disadvantages. Like a Traditional IRA, Roth accounts allow individuals to invest in the market while avoiding capital gains on their investments. Both account types also have 401(k) counterparts, assuming that your retirement plan allows for them.

For Roth IRAs, you pay taxes on your contributions when you make them, unlike Traditional IRA accounts, for which you pay taxes on your distributions. Similarly, Roth IRA accounts allow for tax-free distributions (including investment earnings) when you reach retirement age. Additionally, Roth contributions can be withdrawn, without penalty, assuming you meet certain guidelines.

The first consideration when trying to determine which IRA is right for you is your tax bracket. Think of it like this, if you believe your taxes will be lower (as a percentage) in retirement, then a Traditional IRA may make sense. Conversely, if you are in a lower tax bracket now than you will be when retired, a Roth IRA may be best.

In 2019, the maximum contribution to a Roth IRA is $6,000 – up from $5,500 in 2018. For persons over age 50, an additional $1,000 can be contributed to the account. Like Traditional IRAs, there are also income thresholds. However, while traditional IRA thresholds refer to deductibility of contributions, Roth IRA thresholds refer to eligibility.

For example, in 2019, a married couple with a modified adjusted gross income of $190,000 cannot deduct Traditional IRA contributions. They can make Traditional IRA contributions, but they cannot deduct them, or they can also make Roth IRA contributions. For this couple in particular, it probably makes sense to contribute to the Roth IRA only after both spouses have contributed $19,000 each to their respective 401(k)s ($25,000 if they are over age 50).

If you have questions about which is right for you, contact us for a consultation.

 

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