What is the best option for someone with no retirement savings at 38 years old: a traditional IRA or a Roth IRA?
At your current salary a Roth IRA would be to your advantage since your tax bracket would reflect a lower bracket with your income.
With a Roth IRA you will:
- Reduce your tax rate risk: The risk that taxes in the future could be higher than they are today. Once it is converted, any withdrawals from the Roth account after five years and achieving the age of 59.5 will be tax-free.
- Eliminate your Required Minimum Distribution: Once you turn 70.5 years of age the government wants your tax dollars so badly that they require you to take these funds out of your traditional IRA every year. If you forget the IRS will impose a 50% penalty.
- When withdrawing funds from your traditional IRA, the income counts as provisional income, whereas when withdrawing funds from your Roth IRA, the distributions have no Social Security tax. Roth IRA distributions do not count against income thresholds that may cause Social Security benefits to be taxed.
- Your heirs will receive your Roth funds tax-free.
Based on the information you provided, a Roth IRA would be a better option. Currently, your tax rate would be in one of the lower brackets, so the current tax savings from a Traditional IRA contribution would be relatively small. On the other hand, giving up that small tax savings now, you can contribute to a Roth IRA and never pay tax on it again (at least Federal tax).
If other information that is not provided in your question would push you into a high tax bracket, the answer would reverse.
Thanks and feel free to contract me with any follow up questions.
Most likely a Roth as you are in a very low tax bracket and have time (years) for compounding. Then in retirement, all funds will be tax free. Also, if you were to get into a pinch, you can take out contributions any time for any reason so it is very flexible.
Hope this helps and best of luck. Dan Stewart CFA®
Based on your income and low tax bracket a Roth IRA would likely be in your best interest. You are not really getting a ton of benefit from lowering your taxable income, which is what a Traditional IRA would give you. Instead the Roth which is post tax dollars, that grow tax free would likely be the way to go here. The maximum this year for you would be $5,500 into either plan so I would take advantage with as much as you can contribute there as possible. At your income rate you'll fall somewhere in the 12% income tax bracket and just not enough to warrant worrying about tax savings. In addition, with the new standard deductions you'll really be paying minimal in Federal income tax as is. Hope this helps.
Based on your individual information you are in a lower tax bracket (15% if you're a single filer). In that case, a Roth IRA is going to be more beneficial because the tax benefits of contributing to a traditional IRA are relatively small. Instead, it's likely more beneficial to pay taxes now at the lower rate and let the money grow tax-free in the Roth IRA. You'll be able to withdrawal earnings from a Roth IRA after age 59 and a half, penalty and tax-free. Another benefit of the Roth is you always have access to the contributions, and won't be assessed the 10% penalty if the funds are ever needed (although not advised since the whole point of making the contributions is take advantage of the tax-free compounding and set it aside for retirement).
However, if you are married or have other income in addition to what you've stated here that put's you in a higher tax bracket, you may consider the current year tax deduction of an IRA instead.