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Traditional or Roth IRA — which might be right for you?

When it comes to putting away money for retirement, a Roth could make more sense for you than a traditional IRA — or vice versa. Understand the tax and other implications before making a decision.


TRADITIONAL AND ROTH IRAs both provide the potential for tax-beneficial growth that can give your retirement savings an extra boost. “The key difference between the two is the way your contributions and withdrawals are taxed,” says Debra Greenberg, director, Retirement and Personal Wealth Solutions at Bank of America.


Because all or a part of the money you contribute to a traditional IRA can be tax-deductible if your modified adjusted gross income (MAGI) is below a certain amount, using this type of IRA could help slightly lower your current tax bill. (Check or consult with your tax advisor to determine the amount of your deduction.) You’ll only have to pay taxes on the deductible portion of your contributions and any earnings when you begin to withdraw them in retirement.


Contributions to a Roth IRA, on the other hand, are not tax-deductible—but you see a benefit later on, because you won’t have to pay federal taxes on “qualified” withdrawals.1 No matter which IRA you choose, you typically have until the federal income tax return filing deadline (not including extensions) to make your contribution for the previous tax year.


The amounts you can contribute to IRAs can change annually, so it’s best to check with your financial advisor and your tax specialist before making any decisions. They can walk you through all the considerations that apply to your situation. (To find out more about contribution limits for both Roth and traditional IRAs, see our annual Federal limits relating to tax and financial planning guide.)


How Taxes Might Influence Your Decision

“Because of the tax differences, a traditional IRA is usually considered more advantageous for people who expect to be in a lower tax bracket in retirement,” says Greenberg. “But a Roth IRA might be better for you if you anticipate that your tax bracket will be higher when you retire.”


You may find a Roth IRA advantageous if there’s a chance you may need to tap into your IRA before you reach age 59½, because under certain conditions your contributions to a Roth IRA may be withdrawn at any time without taxes due; however, the withdrawal must be qualified in order for earnings on your contributions to be free of federal income tax (including free of a 10% additional early withdrawal tax), unless an exception applies. With a traditional IRA, if you withdraw funds before you reach age 59½, those withdrawals will be subject to not just federal income tax, but also a 10% additional early withdrawal tax—again, unless an exception applies. A tax professional can help you here.


What About Required Minimum Distributions?

Another big difference between the two is that with a traditional IRA, you must begin taking required minimum distributions (RMDs) once you reach your “required beginning date.”


The required beginning date for taking RMDs from a traditional IRA is age 722. Generally, distributions from IRA assets for which a deduction was taken on the contributions are taxed as regular income at the time of distribution.


“With a Roth IRA, there are no minimum withdrawal requirements for the original account owner, so if you’re planning to use your IRA as another way to keep on investing for your heirs, a Roth IRA may be the better choice for you,” Greenberg notes.3


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1 For a distribution from a Roth IRA to be federal (and possibly state) income tax-free, it must be qualified.

A qualified distribution from your Roth IRA may be made after a five-year waiting period has been satisfied (this period begins January 1 of the tax year of your first Roth IRA contribution or Roth IRA conversion, if earlier) and you (i) are age 59½ or older, (ii) are disabled, (iii) qualify for a special purpose distribution such as the purchase of a first home (lifetime limit of $10,000), or (iv) are deceased. If you receive a nonqualified distribution from your Roth IRA, any earnings distributed generally will be subject to ordinary income tax, plus a 10% additional federal tax if received before age 59½ unless an exception applies.


2 The required beginning date for RMDs is age 72. You may defer your first RMD until April 1 in the year after you turn age 72, but then you’d be required to take two distributions in that year. Failure to take all or part of an RMD results in a 50% additional tax applicable to the amount of the RMD not withdrawn. Consult your tax advisor for more information on your personal circumstances.


3 An eligible designated beneficiary (EDB) is a surviving spouse, disabled or chronically ill individual, an individual who is not more than 10 years younger than the decedent, or a child of the account owner who has not reached age 21. Distribution rules differ based on the date of death, whether or not the beneficiary is an EDB, and whether or not the original account owner died before or after their required beginning date for Required Minimum Distributions. The rules are complex and distributions have taxable implications. You should consult your personal tax advisor regarding your specific situation.


Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax ‎advisors before making any financial decisions.


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