Selecting the Right IRA: Roth or Traditional?
As April 15th quickly approaches, many individuals find themselves racing against the clock to make critical decisions about their retirement savings. One of the most common questions we hear at WWM is: "Should I contribute to a Roth IRA or a Traditional IRA?" The answer isn't one-size-fits-all—it depends on your unique financial situation, goals, and tax strategy.
Understanding the Basics
Traditional IRA: Contributions to a Traditional IRA may be tax-deductible, depending on your income and whether you (or your spouse) are covered by a retirement plan at work. The money grows tax-deferred, and you pay taxes when you withdraw it in retirement. This option can be particularly advantageous if you expect to be in a lower tax bracket when you retire.
Roth IRA: Contributions to a Roth IRA are made with after-tax dollars, meaning you don't get a tax deduction upfront. However, your investments grow tax-free, and qualified withdrawals in retirement are also tax-free. A Roth IRA is often beneficial if you anticipate being in the same or a higher tax bracket in the future.
Key Factors to Consider
Current vs. Future Tax Rates: If you expect your tax rate to be higher in retirement, a Roth IRA might be the better choice. Conversely, if you think your tax rate will decrease, a Traditional IRA could offer more benefits.
Income Limits: Roth IRAs have income limits for contributions. For 2024, the ability to contribute to a Roth phases out at a modified adjusted gross income (MAGI) of $153,000 for single filers and $228,000 for married couples filing jointly. Traditional IRAs don’t have income limits, but the deductibility of contributions may be limited based on income and retirement plan coverage.
Required Minimum Distributions (RMDs): Traditional IRAs require you to start taking RMDs at age 73. However, recent legislation has scheduled further changes to RMD requirements:
SECURE 2.0 Act of 2022: Increased the RMD age to 73, effective January 1, 2023. Individuals turning 73 in 2024 must take their first RMD by April 1, 2025. (Source: IRS)
Future Changes: Starting January 1, 2033, the RMD age will increase to 75. (Source: NSTP)
Roth IRAs, however, do not have RMDs during the account holder's lifetime, offering an advantage for those looking to leave assets to heirs or manage taxable income in retirement.
Flexibility: Roth IRAs allow you to withdraw contributions (but not earnings) at any time without penalties or taxes, offering more flexibility for unexpected needs.
Time Is of the Essence
With the April 15th deadline fast approaching, now is the time to evaluate your IRA options. Remember, you can still make contributions for the 2024 tax year up until this deadline. A well-informed decision today can have a significant impact on your retirement tomorrow.
Need Guidance?
At WWM, Jackie and I are here to help you navigate these decisions with confidence. Whether you're considering your first IRA contribution or reevaluating your retirement strategy, we're just a call away.
Ready to optimize your retirement savings? Book an appointment with us today to discuss the best IRA strategy for your unique situation.
