What is the difference between a traditional IRA and a Roth IRA? Which one should I choose? Can I have both? TD Ameritrade can help you decide.
An Individual Retirement Account (IRA) is the primary way many people invest for retirement when they don’t have access to a 401(k) or employer-sponsored retirement plan at work. Others use it to supplement the contributions to their employer's plan in an effort to maximize savings.
Either way, an IRA may be a great way to invest for retirement and reduce your taxes. Which one you choose will depend on many factors, including your eligibility and financial situation.
The contribution limits for traditional and Roth IRAs are the same: $5,500 (2017 & 2018), plus an additional $1,000 if you’re age 50 or older. And they have the same deadline. You have until April 17, 2018 to make a 2017 contribution.
However, traditional and Roth IRAs offer different features and tax benefits, which may make one more appealing to you than the other.
Your decision may ultimately come down to whether you expect your income tax rate to be higher or lower in retirement. For example, if you think your tax rate will be higher, you may decide to contribute to a Roth IRA and pay taxes now at your current rate. During retirement, any qualified distributions would be tax free regardless of your tax bracket. On the other hand, if you think you'll be in a lower tax bracket in retirement, you may want to a consider a traditional IRA and pay taxes later when you take the money out.
Because no one knows for certain what the future holds, you may want to consider having both a traditional and Roth IRA. This approach may help you create a withdrawal strategy in retirement that minimizes taxes and keeps more of your money working for you. Note: between both accounts, you can’t contribute more than $5,500 ($6,500 age 50+) for any one year.
If you already have a traditional IRA and want to potentially reduce your tax bill in retirement, you could consider converting (transferring) some or all of your account to a Roth IRA. You may also want to consider a conversion if your income is too high to contribute to a Roth directly. However, before proceeding, you’ll want to make sure you have enough funds to cover taxes. Any money you transfer is taxable at the time of conversion. Plus, any Roth conversions completed after December 31, 2017 can no longer be "recharacterized," which means they can't be transferred back to a traditional IRA if you change your mind about the conversion.
Traditional and Roth IRAs are both great ways to invest for retirement and offer solid benefits. The type you choose should align with your goals and financial situation. Still not sure which one that is? Check out TD Ameritrade's IRA tools and resources to help you decide. The most important thing is to get started and take control of your retirement.
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