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Depends on what the alternative is. Are we talking IRA vs. 401k, IRA vs. defined benefit pension, IRA vs. taxable, IRA vs. 529 plan, IRA vs. paying down debt, IRA vs. bank account, IRA vs. blowing it on a luxury cruise, IRA vs. giving it to charity?
Biggest advantage: tax-advantaged growth. You don't owe any taxes on stock dividends, bond interest, or sales of appreciated stock shares or mutual fund shares that are held inside an IRA. Since you can re-invest those gains tax-free, an IRA offers a big growth advantage over a taxable investment account over a period of several decades.
Another big advantage: contributions to an IRA are tax-deductible for most people. Contributions to a Roth IRA are not tax-deductible, but withdrawals (of initial money deposited prior to retirement age, of initial money deposited PLUS any gains after retirement age) are tax-free.
Disadvantages: Except for a very few limited circumstances, you will pay a big penalty on any withdrawals made from an IRA prior to age 59 1/2. You can withdraw your initial deposit money from a Roth IRA at any age, but you will owe taxes and penalties if you withdraw any gains made (again, there are a few limited exceptions to this rule). IRAs (but not Roth IRAs) have required minimum distributions: starting at age 70 1/2, you MUST start withdrawing a certain minimum amount of money from your IRA account yearly, whether you need the money or not (and you will be paying taxes on that withdrawal). And since this withdrawal is taxable income, it may push you into a higher overall tax bracket, causing you to owe taxes on Social Security, making you ineligible for certain government programs and subsidies, etc.
For most people most of the time, the advantages of an IRA or a Roth IRA outweigh the disadvantages.
If you get a IRA its best to go with a Roth. There is no advantage to a regular IRA unless your well off financially and won't really need your social security money to live on and that don't describe the majority of people/workers.
If you get a IRA its best to go with a Roth. There is no advantage to a regular IRA unless your well off financially and won't really need your social security money to live on and that don't describe the majority of people/workers.
This is confusing, they are essentially the same except for one being filled up post tax and the other pre tax, so that when withdrawn they are either taxed or not respectively.
This is confusing, they are essentially the same except for one being filled up post tax and the other pre tax, so that when withdrawn they are either taxed or not respectively.
I'd give the nod to the Roth for most people as well, for three reasons:
1. To take advantage of the tax deduction on a traditional IRA, you have to itemize. A lot of people can't come up with a large enough figure, even when they include their IRA contribution, to justify itemizing instead of just taking the standard deduction.
2. A Roth makes the tax situation simpler when it's time to withdraw money: no tax is owed on the money. That simplicity can matter when someone's no longer as cognitively sharp as they once were.
3. No RMDs. That means no danger of being forced to withdraw so much retirement money in one year that you now have to pay income taxes on your Social Security checks, or no longer qualify for programs that have firm income-limit cutoffs.
But a traditional IRA still offers the biggest advantage: tax-free growth over decades. So taking advantage of either a traditional or a Roth IRA is a very good idea!
If you get a IRA its best to go with a Roth. There is no advantage to a regular IRA unless your well off financially and won't really need your social security money to live on and that don't describe the majority of people/workers.
I strongly disagree.
Suppose you are retired and living off of $1341 per month in SS benefits (the average 2016 benefit) plus withdrawals from a 250k nest egg (using a 4% withdrawal rate). The annual withdrawal from the nest egg would be 10k.
The federal income tax bill is $0 if your nest egg is in a Roth, and $0 if your nest egg is in a traditional. (Why? At this income level, SS benefits are not taxable. The 10k is less than than the standard deduction + personal exemption, so is taxed at 0%).
Why would you pay tax now to avoid paying $0 later? It's just throwing money away. Choose the traditional.
Most people end up with less than 250k in their nest egg.
Once you are on track to have your 0% bracket full, you can take another look at the Roth/traditional question.
I'd give the nod to the Roth for most people as well, for three reasons:
1. To take advantage of the tax deduction on a traditional IRA, you have to itemize. A lot of people can't come up with a large enough figure, even when they include their IRA contribution, to justify itemizing instead of just taking the standard deduction.
Incorrect. Traditional IRA deductions are "above the line". They are not claimed on the Schedule A for Itemized Deductions.
I'd give the nod to the Roth for most people as well, for three reasons:
................1. To take advantage of the tax deduction on a traditional IRA, you have to itemize. A lot of people can't come up with a large enough figure, even when they include their IRA contribution, to justify itemizing instead of just taking the standard deduction...............
!
That is incorrect.
You can take the standard deduction and still fund a traditional IRA.
You can even fund a traditional IRA and take a distribution in the same year if your over 59 1/2.
I think this is a huge it depends. Sure traditional IRAs will require RMDs, but that infers you will still have money in traditional IRAs at 70.5. It's pretty easy to convert a % of traditional IRAs to Roth's over many years (to keep income lower), especially if you retire early (in your 50s).
At this point in my life I am putting as much in traditional as I can get tax deferred and the rest goes in my Roth. I am planning to retire in a state without income taxes, so any money that goes into a Roth will come with an additional 7% state income tax. If I convert it when I move to a state with no income tax I save that 7%.
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