Why the Roth Ira Beats the Traditional

As a provision for retirement, the U.S. government created the individual retirement arrangement more than tweny years ago. This tax arrangement came to be known as the traditional IRA after Congress created an alternative retirement provision more than ten years later. Named after a Delaware senator the second individual retirement arrangement became known as the Roth IRA. The traditional IRA was found to be lacking certain features and the Roth IRA was created to address its shortcomings. For most people there are several Roth IRA advantages that we will look at. Today people have a choice between the two retirement vehicles. Most experts recommend the Roth because of its several inherent advantages.

The most popular feature (and the greatest advantage) of the Roth IRA is the fact that once an individual has reached age 59 and 1/2 they can withdraw their retirement monies tax free. In exchange for this privelidge you will forfeit the tax deduction that you would normally receive for a traditional IRA when first depositing your contribution. What this boils down to is a simple question of exchange. Do you want to take a gauranteed tax break up front or hope for a much larger tax break in the future. This is the feature of the Roth IRA which has contributed the most to its popularity.

With the way that the current tax code is constructed, the traditional IRA offers a guaranteed tax break on the initial contribution. However, later, when it is time to take distributions (withdraw your money) you will pay taxes on the sum gain realized in your account. The problem arises if you remain in a high tax bracket into your retirement because distributions from a traditional IRA at taxed at the level of your income, meaning that you will pay 28% if you are in the 28% tax bracket rather than a long term capital gains tax which is lower.

Another key component of the Roth IRA (and this is true for a traditional IRA as well) is that within your account you are not taxed on individual transactions. Unlike a regular brokerage account, an IRA shelters you from taxable events until it is time to withdraw the money (traditional IRA) or forever (Roth IRA). When looking at a long period of time before you will need to withdraw the money, it is advised that you consider an IRA for your investment.

Another advantage of the Roth IRA over the traditional IRA is that you are not forced to take distributions at any particular age. With the case of the traditional IRA once you are older than 70 1/2 years you will be forced to begin to take distributions or suffer a monetary penalty. However, with the ROth IRA there will be no point where you are required to take money out by law. In fact, you can continue to fund your Roth IRA (without withdrawing any money) until you are 100 if you so desire.

Going forward, many have questioned how long the current tax treatment will remain in effect. Some have asserted that Congress will have a tough time keeping their hands off of this retirement money for so long. The reason for this is simple. The government wants to provide more services and because of this they need more revenue. Because of this, many wonder if the main argument in favor of the Roth IRA, the tax advantages, will become moot. So the Traditional IRA, which offers an upfront tax advantage may be the safer way to play it. At this point, it seems uncertain that the current system will be maintained indefinitely. Depending upon your time horizon before retirement, you will have to judge if you believe the government can keep its hands off your money for that long before making your decision.

In summation, those are the essential advantages and disadvantages of the Roth IRA over the traditional IRA. There are many other factors to consider when planning for your retirement including IRA limits and Roth IRA limits so make certain to do your due diligence before deciding on a course of action.

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