For Mark Roberts’ Use: When it comes to retirement planning, there are as many options as there are needs. The trick, then, is figuring out which ones match both your current and future financial objectives. For most of us, the decision to save money in a qualified retirement account is just the first step. The second decision comes down to something a bit more complicated: Should you choose a traditional or Roth account?
These types of accounts are basically direct opposites of one another, at least where their tax statuses are concerned. A traditional account (401k or IRA) allows you to set aside pre-tax money now, and receive taxable distributions in retirement. The Roth version of these accounts is funded by after-tax dollars now, but provides tax-free income when you begin taking distributions someday.
So, a lot of people look at the question this way: Do I want taxable income, or non-taxable income, once I retire? If you expect to receive some other form of taxable income in retirement, possibly pushing you into one of the higher income brackets, it seems obvious to choose the Roth account. On the other hand, many people assume that their income won’t be higher in retirement than it is now, so a traditional account seems like a good choice.
Unfortunately, it’s actually a bit more complicated than that! You also must consider how the two types of retirement options can affect your tax status now. For some people, the ability to lower their overall tax liability, by funding a traditional account each year, saves them a sizable amount of money each year. And that savings further enables them to continue budgeting wisely and saving for the future.
Finally, there are plenty of people who choose to take advantage of both options! For example, some will participate in their employer’s traditional 401(k) fund, while opening their own Roth IRA to even better prepare for their retirements.
If you’re trying to decide which type of retirement account is right for you, or are interested in opening an additional one, give us a call. We can help you compare your options and choose a fund that suits your retirement planning needs.