Welcome to the “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.
Today’s question is about saving for retirement; specifically, whether a Roth or regular IRA — or 401(k) — is the best place to put such savings.
While most financial advisers seem to favor the Roth, I’ve often wondered how they can be so sure, since the right answer to this question requires knowing things about the future that nobody can possibly know.
Watch the following video, and you’ll pick up some valuable info. Or, if you prefer, scroll down to read the full transcript and find out what I said.
You also can learn how to send in a question of your own below.
For more information, check out “Which Is Better — a Traditional or Roth Retirement Plan?” and “New Tax Rates Mean It’s Time to Rethink Retirement Strategy.” You can also go to the search at the top of this page, put in the word “Roth” and find plenty of information on just about everything relating to this topic.
Got a question of your own to ask? Scroll down past the transcript.
Don’t want to watch? Here’s what I said in the video
Hello, and welcome to your “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this answer is brought to you by MoneyTalksNews.com, serving up the best in personal finance news and advice since 1991.
Our question today comes from Robert:
“I keep reading that (the) Roth retirement plan is the way to go, but it seems to me that it’s better to get the tax break now than to get the tax-free income later. What do you think?”
Well Robert, I’ve got three things for you.:
Thing No. 1: Roth versus regular
Let’s start by making sure we understand what Roth and regular retirement accounts are.
With regular retirement accounts, when you contribute to the plan, you get a deduction. However, when you take money out after you retire, you have to pay ordinary income taxes on it.
A Roth retirement account is just the opposite. When you fund a Roth, you don’t get a deduction. But when you take the money out, it’s totally tax-free.
Thing No. 2: Which is better?
Here’s the problem with the Roth versus traditional question: Your best choice depends on things you can’t know.
If you’re in a high tax bracket now, and you’re going to be in a zero tax bracket when you retire, then a traditional account allowing you to deduct contributions is definitely better. If you’re going to be in the same or higher tax bracket when you retire, you’re better off with a Roth.
Some people might have an idea which of these two situations they’ll likely be in, but nobody can know for sure. Tax laws change all the time. And especially if you’re young, how the heck are you supposed to estimate your retirement income, much less guess your tax bracket?
Because you can’t know the far-off future, you can’t know — at least for certain — the proper path.
Thing No. 3: You don’t have to decide
There’s no law that says you can’t have both a traditional and Roth retirement plan. Put some money in a regular and some in a Roth, and you’ll get a deduction now and establish a source for tax-free withdrawals after you retire.
Keep in mind there can be income limitations on both regular and Roth IRAs. If you’ve got a retirement plan at work and make over a certain amount, you can’t deduct a contribution to a traditional IRA. And if your income exceeds a certain amount, you can’t even open a Roth.
For 2018, the ability to fund a Roth IRA starts disappearing when your modified gross adjusted income goes past $189,000 on a joint return. When it hits $199,000, you can’t contribute to a Roth.
For regular IRAs, if you have a retirement plan at work and file jointly, you can deduct an IRA contribution If your modified gross adjusted income is less than $101,000. Over that amount, the deduction phases out and disappears when you reach $121,000. If neither spouse has a retirement plan at work, you can take the full deduction no matter how much you make.
To learn more about other filing statuses and situations, check out IRS Publication 590-A.
Hope that answers your question, Robert.
Got a question you’d like answered?
You can ask a question simply by hitting “reply” to our email newsletter, just as you would with any email in your inbox. If you’re not subscribed, fix that right now by clicking here. It’s free, only takes a few seconds, and will get you valuable information every day!
The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.
I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.
Got any words of wisdom you can offer on today’s question? Share your knowledge and experiences on our Facebook page. And if you find this information useful, please share it!
Find the right financial adviser
Finding a financial adviser you can trust doesn't have to be hard. A great place to start is with SmartAsset's free financial adviser matching tool, which connects you with up to three qualified financial advisers in five minutes. Each adviser is vetted by SmartAsset and is legally required to act in your best interests.
If you're ready to be matched with local advisers who will help you reach your financial goals, get started now.