Question: Which is better, the regular IRA or the Roth IRA?

Home Forums General Discussion Question: Which is better, the regular IRA or the Roth IRA?

This topic contains 9 replies, has 8 voices, and was last updated by Sbolson Sbolson 1 year, 4 months ago.

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  • #134866
    ozob
    Participant

    Hi,

    It seems like most financial ‘experts’ that I hear on the radio or find on the web think
    the Roth IRA is the way to go. Earnings grow tax free, but the principal money invested is ‘after tax’ money. Your current income is reduced without any immediate benefit.

    A regular IRA principal uses pre-tax money, so it reduces your taxable income (and so current taxes) from the start.

    With the regular IRA, you get immediate tax savings that cannot be taken away. (a bird in the hand, so to speak). When it time to start withdrawing the regular IRA funds, one would be retired and most likely in a lower tax bracket, so the taxes would be low at that time.

    With the tax deficit ongoing, I wonder if sometime down the line, the government will change their minds and start taxing Roth earnings. Sometime in the future they will get the balls to realize that they need to start paying their bills and that huge pool of Roth money will look awful tempting to them.

    It just seems to me that the traditional IRA is not that bad of a deal. Am I right or not?

    What do you think? Which retirement funding option do you prefer?

    #134889
    Marvin
    Participant

    Marvin The Roth IRA is the better alternative in my opinion. While no one can know the future it would probably be political suicide to change the law. At most, I believe, they would remove the Roth option for future investors. If your investments grow, as you hope they will, you will not be required to take money out and the possibility exists of leaving a tax free inheritance. Tax avoidance is good; tax evasion not so much.

    #134912
    Karla Bowsher
    MTN Staff

    @ozob, as your question hints at, the traditional vs. Roth IRA decision requires you to know certain factors about your future (like your tax bracket) at the time you make the decision.

    That’s impossible, but you make educated guesses. For example, retirement is a couple of decades away for me an not yet married, so I chose a Roth partly based on my educated guess that I will be in a higher tax bracket when I retire. (I do have some money in a traditional IRA because of a 401k I had to roll over, but I currently put all of my annual $5,500 max contribution in the Roth.)

    I also read everything I could find (from reputable sources) about traditional vs. Roth before deciding. I found this story by Stacy most helpful: http://www.moneytalksnews.com/ask-stacy-roth-or-regular-ira/

    #134914
    Karla Bowsher
    MTN Staff

    @ozob, as your question hints at, the traditional vs. Roth IRA decision requires you to know certain factors about your future (like your tax bracket) at the time you make the decision.

    That’s impossible, but you make educated guesses. For example, retirement is a couple of decades away for me and I’m not yet married, so I chose a Roth partly based on my educated guess that I will be in a higher tax bracket when I retire. (I do have some money in a traditional IRA because of a 401k I had to roll over, but I currently put all of my annual $5,500 max contribution in the Roth.)

    I also read everything I could find (from reputable sources) about traditional vs. Roth before deciding. I found this story by Stacy most helpful: http://www.moneytalksnews.com/ask-stacy-roth-or-regular-ira/

    #135075
    Zigzagger
    Participant

    It is a question of pay the IRS now or pay the IRS later. Lets say there are two investors. Same tax bracket – 25%, same contributions to the IRA, same investment returns. Mr. Traditional IRAer contributes $100,000 to his IRA, his investment doubles and he has $200,000 when he retires. He pays 25% to the IRS and has $150,000 that is his free and clear. Ms. Roth IRAer over the years also invests $100,000. but pays 25% prior to investment, so her investment is $75,000, which also doubles by retirement, so she has $150,000 free and clear. Same as Mr. IRAer. As pointed out in other posts everyone’s situation is different. If you have high credit card bills now, or saving for a house, college, etc. I would go the traditional route. If you think you will be in a lower tax bracket in retirement, go the Roth route. In either case. Good luck.

    #135220
    TWLTWL
    Participant

    I think for most people Roth is the way to go. But individual circumstances vary greatly. This Fidelity chart gives some easy to understand comparisons.

    #135225
    Waterdude
    Participant

    As many have mentioned earlier, Roth or not depends upon your knowledge of the future, which no one does know. I think it is best to diversify and have the Roth also part of your portfolio so can be very flexible later on. I just started Roth since I already have much in my regular 401K.

    #135645
    Waterdude
    Participant

    One thing missed in the earlier discussion example and which is touted in program brochures is that with traditional IRAs and 401Ks where the tax is deferred, you would be including that amount (25%) in the investment and so it would be earning you money till retirement. So, it is not just the simplified pay the U.S. his share now or later. Pay later and you have more money working for you, pay now and you have less money working for you, but you no longer need to pay the U.S. later. Your tax bracket now versus later also is part of the picture.

    #136750
    Shadeseeker
    Participant

    I understand that we can’t know the future, but I’m 50 and I’ve JUST started saving for retirement (I know, bad girl) and I know with relative certainty that I will be living on Social Security and whatever I can save between now and the time I’m 70. So, knowing I’ll be pretty poor, should I just forget about the tax benefits of a Roth because they may not be a real help to me and just go for the tax write-off of the traditional IRA and contribute that tax benefit to my retirement savings? Thanks so much, I haven’t seen this question answered anywhere.

    #136768
    SbolsonSbolson
    Participant

    Yikes! I hope you love your job. Do you have any savings? Not knowing your current income, assets, debts, etc., I would recommend putting the maximum in a traditional IRA. And put the extra money (from the tax savings and anything else you can save) into regular saving/money market account. Sometimes we forget that we have the most flexibility by having money in a savings account before and during retirement. Starting to save for retirement at 50 is a real challenge, but if you change your habits considerably, you can get a decent nest egg.

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