When investing in your retirement one of the questions you’ll need to answer is…. Should I invest in a Roth or Traditional investment vehicle? Another way of asking the same question is, do I want to be taxed now or later? The best retirement vehicle is tough to predict unless you know your financial future and tax rates. Knowing the future may not be feasible, but becoming familiar with a range of potential outcomes is. Bankrate created a Traditional vs. Roth Calculator for us to do just this. If you think tax rates will increase into the future, then increase them in the calculator. A few of the inputs you will want to adjust are your retirement tax rates, your retirement age, contribution amounts, and expected investment returns.
You may see multiple scenarios where Roth is better than Traditional and vice versa. The benefit of having money in both vehicles when you retire is the flexibility it allows in your tax planning. What retirement vehicle is right for you, or are they both right?
Roth: You do not receive a tax deduction on your contributions but at retirement qualified distributions are tax free.
Traditional: You receive a tax deduction on your contributions but at retirement your qualified distributions are taxed as normal income.
Tax free income during retirement
Contributions can be withdrawn without penalty at any time
You can take early distributions on more than just the contributions if for:
- First time home purchase
- Post-secondary education
- Back taxes
- Unreimbursed medical expenses that are in excess of 10% adjusted gross income
You can contribute up until you die
You can leave tax free income to your beneficiaries
Tax deductible on your current income
Has the ability to convert over to a Roth