Choosing between retirement accounts is a decision that affects your financial future, even though it may seem like no one gives much thought to the choice. Understanding the key differences between retirement accounts can be beneficial for making an informed decision and caring for your future self. A Roth IRA (Roth) allows you to contribute after-tax dollars today with the benefit of tax-free withdrawals in retirement.  A Traditional IRA (IRA) offers tax-deferred contributions meaning you pay taxes on withdrawals in the future. The advantage of an IRA is that you can go tax-free today. This decision can be made strategically, influenced by your tax bracket, future income expectations, and retirement goals.

For example, there is a postgraduate individual working for a civil engineering firm. The company comes ready to set up a retirement account and asks to choose an IRA or a Roth. Assume that the individual desires to retire at the age of 65 and does not plan on withdrawing distributions from their retirement account until they are officially retired. At that point, their tax bracket drops significantly, because they go from c-suite positions at their civil firm to a lower income. This would make them a good candidate for a Traditional IRA, because they will experience tax advantages in their retirement, even though they will still be paying taxes. The advantage lies in the fact that they are in a lower tax bracket at the age of 65 than when they were in their early 20s just starting their career.

Now, let’s explore a situation where we might choose a Roth IRA. Some people anticipate that pension income, taxable investments, rental income, or part-time work could place them in a higher tax bracket than during their primary earning years. This could be a situation where they might be a good candidate for a Roth IRA. They will pay their taxes up front while they are still in that lower tax bracket. Assuming their income continues to grow into retirement they will then be able to pull from their accounts tax-free.

The interesting news is that Roth conversions are possible, meaning you can convert your Traditional IRA into a Roth IRA. Some people choose to convert a particular year of lower income to a Roth to capitalize on the lower income tax year. Another reason for a conversion could be to maximize your estate for your family. You will pay the taxes up-front, but your heirs will be able to withdraw that money tax-free.

There are many factors to consider when choosing a Roth IRA or a Traditional IRA and it really depends on the trajectory of your life and your goals. It can be empowering to have the financial literacy to make an informed decision. The tricky part about choosing is it can be challenging to anticipate what your life will look like 10 to 40 years from now. All we can do is consider who we want to be and where we want to be, and plan accordingly.

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The post A Great Debate: Traditional IRA vs. Roth IRA appeared first on New Century Investments.

If you are fortunate enough to have a job that offers a retirement plan, you might be wondering how you can set aside money for your own future.

One of the most common questions I get is: Should I contribute to my Traditional or Roth IRA for my future?

Thankfully, there are a variety of different ways you can save for retirement. Depending on your specific situation and goals as they relate to your financial future, you may be able to take advantage of both accounts. But should you?

While both Traditional and Roth IRAs have their pros and cons, understanding which is right for you — along with understanding the differences between the two — can go a long way in helping you make an informed decision about which will serve your needs best. We’ll explore the details about these two IRA types below so that you can make the best decision possible on which is right for your personal circumstances.

What is a Traditional IRA?

Traditional IRAs are one of the most common types of retirement accounts. Traditional IRAs allow you to set aside a set amount of money each year — up to $6,000 per year (2022), plus an additional $1,000 (2022) if you are over 50 — in a tax-advantaged account. That means you won’t have to pay taxes on the money you put into your IRA until you withdraw it after retirement. Traditional IRAs are especially beneficial to those who are in a higher tax bracket now than they expect to be in the future.

With Traditional IRAs, you receive a tax deduction on the contributions now and defer paying taxes on the withdrawals until a future date. If you expect to be in a lower tax bracket when you retire than you are now, a Traditional IRA might be a better choice for you. If you expect to be in a higher tax bracket when you retire, a Roth IRA might be a better choice for you.

What is a Roth IRA?

Roth IRAs are another type of retirement account that allows you to set aside money for your future. Roth IRAs differ from Traditional IRAs in that you don’t get a tax deduction on contributions now — they are made with after-tax dollars — but all of the growth is completely tax-free. This differs from the Traditional IRA where the contributions are deductible today — but then you pay tax in the future.

Roth IRAs have some big benefits in the long run. Roth IRAs are especially beneficial to those who are in a lower tax bracket now than they expect to be in the future. Additionally, Roth IRAs are a valuable estate planning tool. They have unique rules when it comes time to pass along, and when it comes to tax and estate planning, there are several benefits. And again, the money grows tax-free.

Which One Is Right for You?

When deciding which type of IRA is right for you, you’ll want to take a look at your unique financial situation and goals. However, one thing to keep in mind is that you have until the April tax filing deadline to make your IRA contribution for the year — so you have plenty of time to make your decision. Once you decide which type of IRA is best for you, you’ll want to be sure to start making contributions as soon as possible. Why? Because the sooner you start saving, the more time your money has to grow. The earlier you start saving for retirement, the less you have to worry about what will happen after you retire.

How to Decide Which Type of IRA is Best for You?

There are a few factors you’ll want to consider when making your decision. Some of these factors may weigh more heavily in your decision than others, but they are all important to consider. Here are some of the factors you’ll want to keep in mind when deciding which type of IRA is right for you:

• Current tax situation – If you are in a lower tax bracket now than you expect to be when you retire, a Roth IRA might be a great way to save for retirement. If you expect to be in a lower tax bracket when you retire, a Traditional IRA might be a better choice for you.

• Future tax situation – If you expect to be in a higher tax bracket in the future, a Roth IRA would be a good choice for you. If you expect to be in a lower tax bracket in the future, a Traditional IRA would be a good fit for you.

Conclusion

Deciding if you should invest in a Traditional or Roth IRA is an involved and important decision. There are many factors such as your income, your tax bracket, your future goals, and your risk tolerance. Contact us today for more information.

Take the Next Step

Are you ready to start taking control of your financial future? New Century Investments is here to help. We are a holistic, tax-focused financial planning firm that can provide you with the peace of mind and confidence you need throughout your life. We have experienced CPA and CFP^® professionals on staff who can provide you with comprehensive services, including tax preparation, investment management, tax planning, financial planning, retirement planning estate planning, and wealth building for entrepreneurs. Schedule your free consultation today to learn more about how we can help you reach your financial goals.

Matt Ward, CFP^®

817-238-6300

Matt.Ward@newcenturyinvestments.com

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The post Should You Contribute to a Traditional or a Roth IRA for your future? appeared first on New Century Investments.