By Sunwook Jin, CFP®, CRPC®, CMFC®

Opening or using an Individual Retirement Account (IRA) could be one of the most effective moves you’ll ever make in your retirement planning.  IRAs offer you the total versatility to invest in virtually any type of investment you desire, well beyond the Mutual Funds and Exchange Traded Funds (ETF) that many 401k plans offer.  With IRAs, you could invest in individual stocks, bonds, as well as real estate and precious metals.

The big concern with IRAs from a tax perspective is whether to select a Traditional IRA or a Roth IRA.  Both have upside as well as downside, and the appropriate choice could vary depending upon your financial scenario.

The essence of the difference between the Traditional and Roth IRA is the timing of the tax break you receive.  With a Traditional IRA, you get a tax break in advance, because you’re able to typically deduct your contribution from your annual income tax obligations in the year you place in the account.  That benefit places additional money in your pocket practically right away after you add to your account.  By comparison, a Roth IRA does not provide you an up-front tax deduction.  Rather, you typically do not require to pay any tax obligations on withdrawals after you retire (typically starting at age 59½)

In choosing whether to utilize a Traditional IRA or Roth IRA, the initial factor to consider is that there are income limitations over which you don’t really have an option.  Roth IRAs are not eligible for single tax filers making greater than $135,000 in 2018 (Greater than $199,000 for joint tax filers).  Those whose incomes are somewhat lower than these limitations could make partial contributions to a Roth IRA.

Presuming both kinds of IRAs are offered to you, the essential aspect in figuring out which is ideal for you is to compare your present tax bracket with the bracket you’re most likely to be in when you retire.  If you’re paying rather high-income tax currently, as is typical for those in the prime of their professions, a Traditional IRA provides you a likewise bigger tax break.  If you anticipate being in a lower income tax bracket later on, then obtaining that large tax deduction now may certainly equate into much less tax obligation in the future, providing you a bigger total after-tax savings for your retirement.

However, if you are anticipating similar or lower tax bracket during retirement years, you may want to consider using a Roth IRA.  Since you’re in a similar or lower tax bracket, it’s worth it to give up that up-front tax deduction for the tax-free income in retirement years.

It’s difficult to forecast with assurance what future income tax obligation will resemble, so you’ll never be certain whether you’ve made the right choice till you retire.

In 2018, you can contribute up to $5,500 (or $6,500 for age 50 or older) per person.  However, if you are unsure or having difficulties in choosing, you can have both Traditional IRA and Roth IRA.  As an example, you can contribute $2,750 in a Roth and the other $2,750 in a Traditional IRA.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax-free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.


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