Posted on February - 01 - 2011
What is best option to choose: traditional IRA or Roth IRA?
The year 2010 was a year of Roth IRA. This was the common theme of television, radio, and literature. However, many people are still struggling to decide whether to choose traditional IRA or Roth IRA. Roth is the same with the traditional IRA in terms of tax benefits. Both plans are a basket for collecting the money and partly protected against taxes. The main difference between ira and roth ira is the time of imposition. Traditional IRA is taxed on distributions while a Roth IRA is taxed on contributions. So if you think you’ll be on the lower tax bracket at retirement, it is best to choose traditional IRA to Roth.
When you consider difference between a Roth IRA and a traditional IRA your conclusion should be based on future income tax rate. If taxes will be higher in the future than you pay now, you will be rewarded with a Roth IRA. If taxes are exactly the same, it does not really matter.
The trick is to guess what your tax rate will be the future. It’s a safe bet that tax rates will rise, where they are now. On the other hand, your income needs may be lower in retirement, but you need to include the costs due to medical bills, long-term care, etc. During the retirement there can be some years when your spendings decrease and others where they grow.
Comparing ira vs roth ira, you need to consider that if there are many years before you will need to go to retirement, then you have no possibility to define what tax rates will be in the future. In addition to the unsteadiness of future income tax rate is the uncertainty of what the expenditure and income arising will be needed in the future.
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