How To Choose Between a Roth and Traditional IRA at 60
Roth and traditional individual retirement accounts (IRAs) are both tax-advantaged retirement savings accounts that allow you to grow your investment portfolio. You can contribute to either at any age, as long as you have earned income and meet the eligibility requirements.
Here’s what to consider if you’re choosing between a Roth and a traditional IRA.
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The difference between a traditional and Roth IRA
Traditional IRAs allow your money to grow tax-deferred, and you don’t have to pay taxes until you withdraw the money after age 59½. There’s no income-based restriction to contribute. If your income is below a certain level and you and your spouse don’t have an employer-sponsored retirement account, your contributions are deductible. If not, the amount that you can deduct may be limited. Once you reach age 73, you’re required to make withdrawals.
Roth IRAs, on the other hand, are funded with after-tax dollars and your withdrawals of the earnings are tax-free after age 59½ and as long as you made your first contribution at least five years ago. Withdrawals of the contributions can be made at any time without taxes or penalties. Roth IRAs don’t have the required minimum distributions (RMDs) once you hit age 73 that traditional IRAs have, but they do have income limits. If your income is higher than the limit set by the IRS, you’re not eligible to contribute to this type of account.
The contribution limits are determined by the IRS each year, and are the same for traditional and Roth IRAs.
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Choosing between a traditional and Roth IRA
The decision between a traditional and Roth IRA should be determined by your specific financial and tax situation and retirement goals, and you may want to consult a financial advisor before you open an account.
People with higher tax rates who think they’re income — and therefore, tax rate — will be lower when it’s time to withdraw may want to put their money into a traditional IRA. As experts at Charles Schwab point out, older adults may want to contribute to a traditional IRA if they’re looking to lower their taxable income, or if you want to eventually perform a backdoor Roth conversion (more on that below).
If you think your tax rate will be higher when it’s time to withdraw the money, you may want to consider a Roth IRA, since you won’t pay taxes on the withdrawals. But there could be benefits otherwise, like if you want to continue growing your money tax-free without facing RMDs or want to pass money onto your heirs.
Assessing your current and expected future tax rates and needs will help you decide which account is right for you. And the approach that worked this year may not be the right choice next year, so you should review your tax and retirement savings strategies regularly.
What is a Roth conversion?
Just because you’ve put money into a traditional IRA doesn’t mean it has to stay there. A Roth conversion allows you to move money from a pre-tax retirement savings account to a Roth one. You’ll have to pay taxes on the funds to convert, but then they grow tax-free.
If your income is higher than the income limits of contributing to an IRA, you can contribute to a traditional IRA and convert the funds later to a Roth account. This is called a "backdoor Roth IRA.”
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