Should You Contribute to a Traditional IRA or a Roth IRA?

Contributing to a Traditional IRA or a Roth IRA generates a lot of questions and confusion each year.

First Step..Your Employer Plan

Remember your top priority is contributing to a employer-sponsored savings plan, such as a 401k or 403b plan each year.  These plans offer many advantages- pretax contributions, tax-deferred growth, automatic payroll deductions and possibly a company match.  If you're eligible for an employer match in your plan, you should take advantage of this option.  Your employer is offering free money, completely tax deferred!  Don't pass this up if you're able to.

Next Step..IRA

When choosing an IRA, start by figuring out what you qualify for, based on your adjusted gross income (AGI), marital status, employer retirement plan coverage and age.  It can be a little tricky, your IRA custodian should be able to help you.

If you are not eligible to make a deductible contribution to a Traditional IRA but are eligible to make a contribution to a Roth IRA, contributing to a Roth IRA is generally the better option.  After tax contributions made to either the Traditional IRA or Roth will grow tax deferred, but with the Roth IRA withdrawals can be tax free-which will be a huge tax advantage.  You'll pay ordinary income tax on the withdrawals from your Traditional IRA.

If you are eligible to make a deductible contribution to a Traditional IRA, the decision isn't so straightforward.  There are several factors to consider:

  • Consider your current and expected retirement tax bracket.  If you expect your tax bracket in retirement to be the same or higher than your tax bracket this year, then the Roth IRA may be a better choice.  A deductible Traditional IRA will be a better choice if your tax bracket will be significantly lower in retirement.
  • How long until retirement?   The longer your investment grow within the IRA, the greater the advantage of the Roth IRA, thanks to tax-free withdrawals.
  • Are you leaving your IRA to beneficiaries or trying to postpone withdrawals beyond age 70 1/2?

A healthy retirement will depend on how much you are able to save each year.  Boost your savings with an employer plan and by contributing to your IRA each year.  Use both!

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Contribution Limits

Traditional IRA and Roth IRA
Tax Year Under Age 50 Above Age 50
2016 $5,500 $6,500
2017 $5,500 $6,500