Which Type of IRA Is Best: Pre-Tax or Roth?
When it comes to retirement savings account it’s the age-old question: pretax or Roth? For starters, no two situations are exactly alike, so there is no one-size-fits-all answer to this question. It will all depend on your situation and your financial goals. However, there are some factors to consider that will help you make the best determination.
Find Your Tax Bracket
To start, determine your tax bracket. If you’re starting your IRS early in life then chances are you’re in a lower tax bracket. If that’s the case, then it might be a good time to contribute to a Roth IRA. That means you put money in after you’ve already paid taxes on it. It means less money in your pocket, but it also means you pay taxes at a lower percentage so you’re not giving as much to the IRS. The plus side to this is that you get to enjoy tax-free withdrawals later in life even though the value of your contributions has increased.
High Earners Might Prefer a Traditional IRA
If you’re already in one of the highest tax brackets, then contributing to a traditional IRA, like a 401(k) plan might make more sense. This money comes out of your paycheck before your taxes, which means you pay a lower amount to the IRS. Furthermore, when you do finally start withdrawing from your IRA, chances are you will be in lower tax bracket. That’s because you will likely be done working and your income will be much lower. But that is not always the case, especially as more people are working later in life.
What About Tax Diversification?
This is another solid option. Essentially it means you don’t put all your eggs in one basket. Instead of contributing to just a single type of account, you invest in several different “buckets.” You can choose between pre-tax investments, like a 401(k), after-tax investments, like a Roth, and taxable investments, like buying stock. This money is contributed after-tax, like a Roth, but you pay tax on any gains you earn, either short-term or long-term. The amount will depend on which tax bracket you’re in and which type of gain it, based on how long you’ve owned the stock. The benefit of tax diversification is that you don’t get locked into one type of investment. This allows you a lot more flexibility as your financial situation changes.
Need More Help? Contact GROCO
Having an IRA is a good idea, no matter which type you choose. Additionally, for some people having both types of accounts is a good move. The bottom line, you have to weigh your options, evaluate your goals, and then choose the best method for you. Furthermore, your tax situation can change regularly so what’s best at one point might not be the best later on. In fact, it might make more sense to start with one type and later switch to the other. If you need additional help choosing how to save for retirement, then give a GROCO a call, or contact us online.
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