Wealth Column: Saving in a traditional IRA versus Roth IRA

Two of the most common forms of IRAs, Roth and traditional, work in very different ways. Deciding whether a traditional or Roth IRA is the right investment vehicle for you begins with understanding the difference between the two.

What's What?

A traditional IRA is funded with pre-tax money, which means you pay taxes on it when you withdraw it, potentially lowering your taxable income now. That can mean a lower tax bracket or being eligible for tax credits you may have otherwise been phased out of, like the child tax credit. Anyone who has earned income and is under 70 1/2 years old can contribute to a traditional IRA. As far as withdrawing that income, the earliest you can take it out, without penalty, age 59 1/2 Traditional IRAs have Required Minimum Distributions attached to them, meaning you must start withdrawing (and paying tax on!) a certain percentage of your account by 70½, whether you need it or not. The important thing to remember with Required Minimum Distributions is to do just that—remember them. The government will not tell you when to take them, or how much to take, but they will happily charge you a penalty if you don't.

Roth IRAs work a little differently. They are funded with post-tax money, meaning you pay the taxes on that income now. That also means your Roth IRA contributions grow tax-deferred. Because of that, the IRS will only allow people up to a certain income level to contribute. In 2018, that cut off is $135,000 ($199,000 if married, filing jointly.) When it comes to withdrawals, there are no Required Minimum Distributions, but you can't take your earnings out of a Roth for the first five years you own it. You can, however, take out your contributions whenever you need them without penalty. As long as you're past the five year limit and are over the age

of 59½, you can withdraw Roth IRA income at any time, for any reason.

Roth IRA May Be Better For...

Anyone making less than the income limit on Roth IRAs and thinking they may be in a higher tax bracket later in life could benefit from a Roth. By paying the taxes now, you could end up saving money in the long run.

These can be great options for people who are looking to retire before age 59 ½, when traditional IRA and 401(k) funds become available. They can also be a great way to set aside tax-advantaged income to help lower your income taxes in retirement, if you're able.

Traditional IRA May Be Better For...

Those of you who are making more than the Roth limit can still use a Traditional IRA and see huge benefits. If you are in the prime of your career, you are likely going to make less income in retirement, meaning a lower tax bracket to pay those taxes on your investments. It can also mean placing you in a lower tax bracket now, which could also save you money now. Other certain restrictions apply, so be sure to talk to your adviser about whether or not this options makes sense for you.

No matter which option you use, we commend you for starting, or continuing, to save for your retirement.

If you need help deciding which option will work best for your unique financial situation, we recommend discussing it with a financial adviser so that you can be confident in your investing decisions for the long road ahead.