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Sorting Out Your IRA Options

January 22, 2020

Here are general guidelines to help you decide which IRA (individual retirement account) is right for you:

If you’re eligible to contribute to a Roth IRA and also make tax-deductible contributions to a traditional IRA:

Assuming you would contribute the same amount to either type of IRA, your decision depends on what you’d do with your tax savings if you make tax-deductible contributions to a traditional IRA. Your decision also depends on your projected tax bracket in retirement.

For example, if you contribute $5,500 a year to a traditional IRA and you’re in the 24% federal income tax bracket, your tax bill would be reduced by $1,320. Would you take this amount from your tax refund or from savings and invest it in a taxable account for retirement each year?

If you invest this savings and add it to your traditional IRA, and you project that your income tax bracket in retirement will significantly decrease, you would have more after taxes at retirement with a traditional IRA than a Roth IRA. Why? You’re sheltering current income from a higher tax rate now and making withdrawals later at a lower tax rate.

Even if you’d invest these savings, but you project your income tax bracket in retirement will stay the same, fall only slightly, or increase, you’ll have more after taxes with a Roth than a traditional IRA.

Similarly, if you wouldn’t invest these savings, you’ll have more after taxes at retirement with a Roth IRA. That’s because you spent all your up-front tax savings from your traditional IRA contributions, so that money is not part of your retirement fund.

If you’re not eligible to make tax-deductible contributions to a traditional IRA, but you’re eligible to contribute to a Roth IRA:

You’ll have more after taxes at retirement if you contribute to a tax-free Roth IRA rather than making nondeductible contributions to a tax-deferred traditional IRA.

If you’re only eligible to make non-deductible contributions to a traditional IRA: Whether this type of IRA contribution is right for you depends on what types of investments you’ll make and other available retirement savings options.