The debate is a long-standing one: Is a Roth or a traditional IRA a better tool to save for retirement? The debate doesn’t end the older you get. In fact, as workers approach retirement age, it’s perhaps even more important to look closely at the relative benefits and disadvantages of each type of account.
The Differences and Similarities of Traditional and Roth IRAs
With a Roth IRA, you contribute money after taxes, and qualified withdrawals come out in retirement entirely tax-free, even any investment returns you earn in the account. A traditional IRA is more like a 401(k). When contributing to a traditional IRA, you contribute pre-tax and your money grows tax-deferred. You pay taxes when you start withdrawing the money in retirement.
While the contribution limit is the same for both traditional and Roth IRAs ($5,500 per year in 2018, plus an extra $1,000 for people 50 and older), one of the big benefits of a traditional IRA is that by contributing before your income is taxed, you are able to invest the same dollar amount with less of an impact on your bottom line.
With a traditional IRA, if you have a retirement plan at work to which you contribute, there are special rules applying to you and your spouse. Both have income thresholds, but traditional IRAs limit the ability to deduct contributions based on income.
A Roth IRA doesn’t have required minimum distributions, whereas a traditional IRA requires distributions starting at age 70.5. Thus, a Roth can offer more control over your retirement income and your retirement tax bill. More details on the rules are available on the IRS website. (For related reading, see: Avoiding Mistakes in Required Minimum Distributions (RMDs).)
The Best IRA for Older Workers
Determining which account is best for older workers is entirely situational.
When to Consider a Roth IRA
- If you still have 30 years left to save, a Roth IRA may be your best option.
- If you’re planning to work well into retirement, and your family history and health status suggests a long life, consider the fact that you can contribute to a Roth IRA at any age, unlike a traditional IRA, which prohibits contributions after age 70.5.
- For an older worker with only a traditional IRA, it might make sense to consider a rollover to a Roth IRA.
- For older workers who have a traditional IRA, it often makes sense to convert small amounts of their traditional IRA to a Roth over several years (there’s no income limit on conversions so anyone can do it), while they’re still working. That keeps the tax bill manageable and means they avoid paying taxes on that money in retirement, when the income sources to pay bills generally are more limited. (For more from this author, see: Retiring Soon? 10 Things to Consider First.)
When to Consider a Traditional IRA
- For a worker with only a 401(k) plan or other workplace account who is considering moving to an IRA, rolling into a traditional IRA makes the most sense, unless he or she is ready and willing to pay income taxes on the money, which is necessary if assets in a 401(k) are moved to a Roth IRA.
- Another area to consider is estate planning: Do you expect to leave this retirement account to a beneficiary? If so, it might be a wonderful gift to leave a Roth IRA because the beneficiary won’t owe any taxes on distributions. However, if your tax rate is higher than the beneficiary’s, it might be smarter to bequeath a traditional IRA and let them pay the tax bill.
There is much to consider when determining which type of IRA account to use. There are benefits to both types of accounts, but it is important that you carefully analyze your personal situation and determine which account will work best for you.
(For more from this author, see: Corporate Bonds for Retirement Accounts.)