Contributed by: Kali Hassinger, CFP®
If you’re planning to use an IRA to save for retirement, but aren’t sure whether Roth or Traditional is best for you, we can help sort it out. Before we break down the pros and cons of each, however, we need to make sure that you are eligible to make contributions.
For 2019 Roth IRA contribution rules/limits:
For single filers, the modified adjusted gross income (MAGI) limit is phased out between $122,000 and $137,000. (Unsure what MAGI is? Click here.)
For married filing jointly, the MAGI limit is phased out between $193,000 and $203,000
Please keep in mind that it makes no difference whether you are covered by a qualified plan at work (such as a 401k or 403b). You simply have to be under the income thresholds.
The maximum contribution amount is $6,000 if you’re under age 50. Those who are 50 and older (and have earned income for the year) can contribute an additional $1,000 each year.
For 2019 Traditional IRA contributions:
For single filers who are covered by a company retirement plan (401k, 403b, etc.), in 2019 the deduction for your IRA contribution is phased out between $64,000 and $74,000 of modified adjusted gross income (MAGI).
For married filers covered by a company retirement plan, the deduction is phased out between $103,000 and $123,000 of MAGI.
For married filers not covered by a company plan, but who have a spouse who is covered, the deduction is phased out between $193,000 and $203,000 of MAGI.
Maximum contribution amount is $6,000 if you’re under age 50. Those who are 50 and older (and have earned income for the year) can contribute an additional $1,000 each year.
If you are eligible, you may be wondering which makes more sense for you. Well, as with many financial questions…it depends!
Roth IRA Advantage
The benefit of a Roth IRA is that the money grows tax-deferred. When you are over age 59 ½, you can take the money out tax free. However, in exchange, you don’t get an upfront tax deduction when investing in the Roth. You are paying your tax bill today, rather than in the future.
Traditional IRA Advantage
With a Traditional IRA, you get a tax deduction for the year you contribute money to the IRA. For example, a married couple filing jointly with a MAGI of $190,000 (just below the phase-out threshold when one spouse has access to a qualified plan) would likely be in a 24% marginal tax bracket. If they made a full $6,000 Traditional IRA contribution, they would save $1,440 in taxes. To make that same $6,000 contribution to a ROTH, they would need to earn $7,895, pay 24% in taxes, and then make the $6,000 contribution. The drawback of the traditional IRA is that you will be taxed on it when you begin making withdrawals in retirement.
Pay Now or Pay Later?
It’s challenging to decide which account is right for you, because nobody has any idea what tax rates will be in the future. If you choose to pay your tax bill now (Roth IRA), and in retirement you find yourself in a lower tax bracket, you may have been better off going the Traditional IRA route. However, if you decide to make a Traditional IRA contribution for the tax break now, and in retirement find yourself in a higher tax bracket, then you may have been better off going with a Roth.
How Do You Decide?
A lot depends on your situation, such as the career path you’ve chosen and your desired income in retirement. However, we typically recommend that those just starting their careers (who will most likely see their incomes increase over the years) make Roth contributions. If your income is stable, and you’re in a higher tax bracket, a Traditional IRA and immediate tax break may make more sense now.
Before making any final decisions, it’s always a good idea to work with a qualified financial professional to help you understand what works best for you.
Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.
UPDATED from original post on June 19, 2014 by Matt Trujillo, CFP®
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Kali Hassinger, CFP®, CDFA®, and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. You should discuss any tax matters with the appropriate professional.