In this month’s edition of Wrigley’s Write Up, we are going to discuss how you decide what kind of contributions to make to your retirement accounts. This applies to different types of retirement accounts, whether it be through an employer or IRA accounts that you manage yourself.
The focus is still on Roth or Traditional contributions, so to begin, it must be clarified that not all employer plans allow you to make Roth contributions. So, if you are thinking about doing that through your employer, the first thing to do would be to check to see if it is a possibility or not.
These accounts have various eligibility rules based on income and contribution limits that could affect your choice, but doing some basic tax planning will bring you to a reasonable conclusion.
How do I choose an IRA if I qualify for both accounts?
A general guideline is often that if you think your tax bracket will be higher when you retire than it is today, you may want to consider a Roth IRA—especially if you’re younger and have yet to reach your peak earning years.
On the other hand, if you think you’ll be in a lower tax bracket when you retire, a traditional IRA could make more sense to take the current tax benefits when you’re in a relatively high tax bracket and take withdrawals when you’re potentially in a lower bracket.
The Bottom Line
Both Traditional and Roth IRAs are great long-term savings tools and by educating yourself on them and discussing with your financial advisor and tax professional could go a long way in making the right choices.
Contributions to a traditional IRA may be tax-deductible depending on the taxpayer’s income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Like Traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. IRA tax deductibility and contribution eligibility may be restricted if your income exceeds certain limits, please consult with a financial professional for more information. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Forman Investment Services and not necessarily those of Raymond James.