Traditional IRA or ROTH IRA? Which Is Best for You?

Owners of traditional IRAs may continue to convert these accounts to Roth IRAs, regardless of income, allowing more taxpayers to take advantage of the Roth IRA through direct contributions or conversions. When converting, the distribution from your traditional IRA is taxed, but you are not penalized for the early withdrawal.

Switching to a Roth from a traditional IRA can make more of seniors’ Social Security benefits taxable in that year, and the increase in income could cause loss of some tax breaks. Try to schedule the conversion in a year your income dips or you have investment losses. Upper-incomers may have to pay a surcharge on their Medicare Part B premiums, and Roth conversion income counts toward the AGI trigger point. Even lower-income seniors who convert might see more of their Social Security benefits taxed, but at least they won’t have to take minimum distributions from the Roth and any withdrawals will be tax free.

A conversion must meet certain conditions and the taxation on the conversion can be complex. Always consult with your advisor before making a conversion to determine if it is right for you.

If you are fairly young, expect to be in a similar tax bracket when you retire, or are concerned about cash flow during retirement, a Roth IRA may be an appropriate choice. If you are older and expect to be in a lower tax bracket, you may be a candidate for a deductible IRA. Keep in mind, however, that a number of factors need to be considered when choosing an investment vehicle. We can help you calculate which retirement savings strategies are right for you. For additional information on IRAs, see the chart on page 27. Whichever IRA you choose, start making contributions now, and continue making them each year. Doing so will allow you to take full advantage of the tax benefits.

Which IRA Is Best For You?

TRADITIONALROTH
Eligibility RequirementsAny age with compensation, subject to income limitsAny age with compensation, subject to income limits

Tax BenefitTax-deferred growthTax-free growth

Tax Treatment of WithdrawalsEarnings and deductible contributions are taxed when withdrawnTax-free withdrawals (five-year requirement and other conditions must be met)

Contributions Tax deductible (deductibility depends on retirement plan participation status and income limits) Not deductible




Maximum Annual Contribution (2020) $6,000 or 100% of compensation, whichever is less, per person per tax year (aggregate to both a traditional or Roth IRA, plus an additional $1,000 for those age 50 and older) Same







10% Early Withdrawal Penalty Yes, if under age 59½ and withdrawal is not for higher education expenses, qualified first home purchase, certain major medical expenses, or certain long-term unemployment Same







Mandatory Distributions Distributions must start at age 72 No requirement