How to Choose Between a Traditional and Roth IRA

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Traditional and Roth IRAs are accounts that allow you to make annual contributions and that may provide tax advantages as your contributions potentially grow over time. Everyone who earns a paycheck is eligible to contribute to an IRA. Spouses are also eligible, even if they have no income.

When it comes to IRAs, what most people want to know is: How do you choose between a Traditional and Roth IRA? The answer: It depends on a variety of factors. We’ll explore a few of these factors below.

If you are eligible for both a Traditional and a Roth IRA, you can determine which IRA may best fit your needs by considering the following two questions:

Would you rather take a tax deduction now, even if you’ll have to pay taxes on the withdrawals later? If yes, a Traditional IRA may be more appropriate.

Would you prefer to have tax-free withdrawals in the future, even if contributions are not tax-deductible now? If yes, a Roth IRA may be the better option.

To help simplify your choice, try our IRA Selector tool.† This easy-to-use, online tool will ask you a few simple questions, and then provide a recommendation in minutes.

Whether you contribute to a Traditional or Roth IRA, your maximum contribution amount will be $5,500 per year ($6,500 if you’re age 50 or older). IRA investing may be a great way to build up your account balances, even if you’ve delayed saving for retirement. As you look ahead to independence from the working world, it’s important to consider contributing to the IRA that may provide the most benefits, both now and in retirement.

If you need help choosing the right IRA, call us at 1-877-921-2434. One of our dedicated Retirement Representatives will be happy to assist you.
 

Employer plan participation
 

If neither you nor your spouse has access to an employer’s plan, a contribution to a Traditional IRA may make sense, as it will be fully deductible no matter how much you earn. However, if either you or your spouse is covered by an employer’s retirement plan, you would have to factor in how much income you earn to see if a contribution to a Traditional IRA would be deductible.
 

Earned income
 

Do you or your spouse have earned income? This would include wages, salaries, tips, and bonuses. It would not include income from dividends, pensions, or annuities. You or your spouse must have earned income to contribute to either a Traditional or Roth IRA.
 

Tax-filing status
 

Your tax-filing status is another factor in determining the amount you are able to contribute to a Roth IRA, or whether you can deduct a Traditional IRA contribution. For example, if you are covered by an employer’s retirement plan, are married filing jointly, and your combined annual income in 2016 or 2017 is:

  • Less than $98,000 ($99,000 in 2017)—You can take a full deduction when contributing to a Traditional IRA.
  • Between $98,000 and $118,000 ($99,000 - $119,000 in 2017)—You may be able to partially deduct your Traditional IRA contribution.
  • Greater than $118,000 ($119,000 in 2017)—No deduction is allowed. You may want to consider a Roth IRA instead.

Keep in mind, however, that too much income may disqualify someone from contributing to a Roth IRA. For 2016 if you are married filing jointly and earn more than $194,000 per year ($196,000 in 2017), you cannot contribute to a Roth IRA.
 

Age
 

Your age is another important factor in choosing an IRA. For example, individuals over age 70½ are not eligible to contribute to a Traditional IRA, but can contribute to a Roth. Your age also determines if you’re eligible to make “catch-up contributions". The maximum IRA contribution for individuals through age 49 is $5,500. Individuals age 50 and older can make an additional “catch up” contribution of $1,000 each year.

†The information provided by this tool: (1) is designed to help you understand some of the common questions related to choosing an IRA; (2) is derived from publicly available information from the IRS and other sources and is consolidated here as a convenience to you; and (3) does not constitute personal tax advice to you.