We often have clients ask questions about whether they should put additional funds into a Traditional IRA or a Roth IRA and the answer to that question depends on each person’s situation. The general rule of thumb is that if you are in a higher tax bracket now than you think you will be in retirement based on that fact alone a Traditional IRA is a better option, based on that fact alone. You can get a tax benefit today when you’re at a higher bracket than in the future when all IRA withdrawals will be taxable. However, if you’re in a lower tax bracket down the line you’ll be taxed at a lower rate.
The Roth IRA is the exact opposite of the Traditional IRA. For a young professional who’s just getting started in their career, they may be at a lower tax bracket than they will be in the future. For that type of situation, a Roth IRA can be a good option because even though there’s not a tax break today, when you go to pull the money out later in retirement you won’t have to pay taxes on those withdrawals because you’ll be in a lower tax bracket. If you’re going to be in a higher tax bracket down the line, then it might be better to do the Roth now while your tax bracket is low. The choice you make is very dependent on each individual situation. It’s not a bad idea to have both types of IRAs in your portfolio because when you get to retirement you can control the tax bracket of your total income picture and situation a little more than if you were to have one or the other. It all depends on what your other sources of income will be in retirement.