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When is it best to go with a traditional IRA instead of a Roth IRA?


First, an explanation of the two types of individual retirement accounts: A traditional IRA is funded with tax-deductible contributions, and the investment earnings that they produce are also tax free. Tax is only due when withdrawals are made, which must start when the accountholder is 70 and a half years old. Contributions to a Roth are made with dollars that have already been taxed, so the accountholder is off the hook forevermore, as far as tax liability is concerned. Investment earnings are tax free, and there is nothing due when the money is withdrawn.

Two other differences: Because tax has already been paid, there is no requirement to start taking distributions, not at 70 and a half or ever, and contributions to a Roth can be taken out at any time without adverse consequences. By contrast, a 10 percent penalty is assessed on withdrawals from a traditional IRA when the owner is younger than 59 and a half. One way in which the two IRAs are the same is in the maximum contribution of $5,500 a year or $6,500 for those over 50.

Many financial advisers find that these differences make Roth IRAs the better option for most retirement savers. One advantage of a traditional IRA is that most savers’ income is likely to be lower in retirement and so the tax saving on the contributions will be at higher rates than the liability in retirement. But that ignores the likelihood that over many years of generating income and capital gains, there will be far more to withdraw from a traditional IRA than was contributed in the first place, making the net tax liability higher, even after adjusting for inflation and the prospect of lower tax rates in retirement.

-Conrad de Aenlle