When a traditional IRA makes sense over a Roth account

MarketWatch is hosting a “Mastering Your Money” virtual event, which will include sessions on various important personal finance topics. During one session, reporters and editors will tackle some of the most controversial personal finance decisions, including when to invest in a traditional IRA or Roth IRA, if leasing or buying a car makes most sense and why you may or may not want to go with a Health Savings Account. Join in to watch the Financial Face-Off session on Wednesday, April 20 here. 

Traditional IRAs especially make sense for people who expect to be in a lower tax bracket in retirement, since contributions are made on a pre-tax basis (thus, taxes are paid on the money coming out, not the money going in). Of course, it’s not always easy to estimate – if you’re retiring in the next few years, you may have a better idea of what your tax bracket will be, but if you’re a few decades away, it is hard to know what your personal financial circumstances will be or what tax laws the government may change. 

Another reason to go with a traditional IRA: they may be tax deductible, though that depends on if you’re enrolled in an employer-sponsored retirement plan (like a 401(k) plan), your tax filing status and your or your spouse’s income limits. That tax deductibility can be quite powerful during the tax season, though – by one analysis, if you’re in the 32% tax bracket and you contribute the annual limit of $6,000, it could equate to as much as $1,000 off your tax bill. 

You also have until Tax Day to make a contribution on behalf of last year’s IRA, so if your tax bill to Uncle Sam is a little higher than anticipated and you haven’t yet contributed the maximum in your IRA last year, you can tell your investment firm to put your latest contribution toward last year’s account. Just be sure to tell the firm housing your account – if not, the contribution will automatically go toward your IRA for the current year – and make sure it’s done by Tax Day (for this year, that deadline has passed). 

There are plenty of rules associated with traditional and Roth IRAs. For example, you need to be 59 ½ years old to freely withdraw from either account, but you must also begin withdrawals from your traditional IRA by age 72, known as required minimum distributions. Roth accounts do not have RMDs. Congress is also looking at raising the age for required minimum distributions in its follow-up legislation to the Secure Act, which passed in 2019.

Also see: Have an extra $50? $100? Even $20? Use it on an IRA for your future retirement (maybe even sooner)

Not everyone agrees traditional IRAs are the right way to go, such as personal finance speaker Suze Orman. And Roth accounts have their own perks as well – for example, investors can tap into those accounts before age 59 ½ if they’re withdrawing just from their principal. They’ll only pay taxes and penalties on the earnings of those accounts. 

Both accounts allow for penalty-free distributions, however, such as death or disability, up to $10,000 toward a first-time home purchase and qualified education expenses. It’s important to know the rules for either a traditional IRA or a Roth IRA to avoid paying more in penalties and taxes than necessary. 

And don’t forget, if a Roth eventually sounds like a more attractive offer but you’ve been investing in a traditional IRA this whole time, there is the ability to convert some of your assets to a Roth. You would have to pay the taxes on the conversion at the time of that conversion, but it might be worthwhile if you’re in a low-tax bracket yet and you expect to be in a higher one at the time you distribute those funds.