When it comes to your retirement, choosing between a traditional IRA or Roth can be a very important decision. Understanding the benefits and limitations of both is essential when determining how, or if, you are going to use one or the other to save for a successful retirement.

Basic similarities:

  • Both are Individual Retirement Accounts that could offer some tax advantages
  • Allow contributions of $5,500 a year under the age of 50 and $6,500 over the age of 50
  • Possible penalties if funds are taken out improperly before the age of 59½
  • Allow a broad range of investments: Stocks, bonds, mutual funds, annuities, ETFs, CDs, etc.

Important differences:

  • IRA contributions are tax deductible, but taxed as ordinary income when distributed. Roth contributions are made with post-tax dollars, grow tax free and are distributed without being taxed.
  • IRA distributions are taxed and have a 10 percent penalty if funds are taken before the age of 59½. Roth IRAs allow you to withdraw your contributions (not earnings) at any age without tax or penalty.
  • The government forces you to start taking distributions from your IRA at 70½. The Roth IRA has no forced distributions at 70½.

Which one should you choose? Unfortunately, the answer to that question differs from individual to individual as it depends upon your current financial situation and your retirement goals.

For example, if you believe your income is higher now than it will be in the future, it might make sense to use a traditional IRA to reduce your current taxes, especially if it helps you drop to a lower tax bracket. Conversely, if you believe your income or tax bracket will be higher in the future, contribute to a Roth and utilize the tax benefits in retirement.

Keep in mind we’re in a historically low tax environment with a government debt of over 21 trillion. Could this mean much higher tax rates in the future?

Many people also have access to employer plans such as a 401k or 403b, which are taxed in a similar fashion to traditional IRAs. It might make sense to use a Roth to diversify your retirement funds from a tax perspective.

IRAs are one of many tools you have available to build a strong, successful retirement plan. And like any tool, when used properly, it can be very beneficial to the process. But, if used in the wrong way it can damage what it is you are trying to build.

Do not hesitate to reach out to a financial professional to help you make the decision that best fits you.

Luke Gawronski, a financial planner with Barnum Financial Group, is a registered representative of and offers securities, investment advisory and financial planning services through MML Investors Services, LLC. Member SIPC. lgawronski@barnumfg.com