Should I Do Traditional or Roth IRA?

For most people, we think that the Roth is a better deal. The choice is between a one-time tax deduction on your contribution to the IRA and tax-deferred accumulation or tax-free accumulation for the rest of your life. The only time that the one-time tax deduction makes sense is if you think that you will be in a lower income tax bracket in the future (when you will use your IRA fund) than you are now.

Since I am personally of the opinion that income tax rates are more likely to go up than down in the next 20 years, the chances of being in a lower bracket when you take the money out are slim indeed. For 2013, the maximum amount that you can contribute to either kind of IRA is $5,500 — $6,500 if you are over 50.

First, you may not even be eligible for a either kind of IRA contribution. It depends on your marital status, modified adjusted gross income, and whether you are covered by a retirement plan where you work. The adjusted gross income limits are the same for both Roth and traditional IRAs. If you have a retirement plan where you work, are single and make more than $69,000, you are not eligible for a deduction.

If you are married and file jointly, if your combined adjusted gross income is more than $95,000, you are not eligible. And, if you are married filing separately, and make more than $10,000, you are not eligible! If you or your spouse is not covered by a retirement plan at work, you can contribute up to your contribution limit regardless of your Adjusted Gross Income unless (you guessed it) you are filing separately.

If you are not going to get a tax deduction, there is no reason to do a traditional IRA. If you put the same amount of money into a Roth IRA, then you will never again pay tax on that money or the income or growth that you earn with it. In a traditional IRA, you will still pay tax on the income or growth when you take money out. And, you will have to keep records forever, to avoid paying tax on the after-tax contribution you made again.

There is another reason to choose a Roth. A Roth IRA gives you more control over when you have to take money out of your account. If you are young, it may be hard for you to believe that you would not want to take money out as soon as you can, but people often get to age 70 ½ and have enough money put away that they want to continue deferring taxes, using money from their taxable accounts for current expenses. With a Roth, you can do this. With a traditional IRA, you must start taking distributions at age 70½.

So, to keep control over when you want to use your money, and to let your money accumulate tax-free rather than just tax-deferred, the Roth beats the traditional IRA hands down.