How to Choose Between a Roth and a Traditional IRA at 60
Roth and traditional retirement accounts (IRAs) are both tax-advantaged retirement savings accounts that allow you to grow your investment portfolio. You can contribute at any age, as long as you have earned income and meet the eligibility requirements.
Here’s what to consider when choosing between a Roth and a traditional IRA.
The difference between a Traditional and a Roth IRA
Traditional IRAs allow your money to grow tax-deferred, and you don’t have to pay taxes until you withdraw money after age 59½. There is no limit based on the donation amount. If your income is below a certain level and you and your spouse do not have an employer-sponsored retirement account, your contributions are deducted. Otherwise, the amount you can withdraw may be limited. Once you reach the age of 73, you are required to withdraw.
Roth IRAs, on the other hand, are funded with after-tax dollars and your withdrawals are tax-free after age 59½ and as long as you made your first contribution at least five years ago. Withdrawals of contributions can be made at any time without taxes or penalties. Roth IRAs don’t have required minimum distributions (RMDs) when you reach age 73 like traditional IRAs, but they do have income limits. If your income is above the limit set by the IRS, you are not eligible to contribute to this type of account.
Contribution limits are set by the IRS each year, and are the same for Traditional and Roth IRAs.
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Choosing between a Traditional and a Roth IRA
The decision between a traditional Roth IRA and a Roth should be determined by your specific financial and tax situation and retirement goals, and you may want to consult a financial advisor before opening an account.
People with high tax rates who think their income — and therefore, their tax rate — will be low when it’s time to withdraw may want to put their money into a traditional IRA. As experts at Charles Schwab point out, older adults may want to contribute to a traditional IRA if they want to reduce their taxable income, or if they want to eventually do a backdoor Roth conversion (more on that below).
If you think your tax rate will be higher when it’s time to withdraw the money, you may want to consider a Roth IRA, because you won’t pay taxes on the withdrawals. But there can be benefits if not, such as if you want to continue to grow your money tax-free without facing RMDs or if you want to pass money on to your heirs.
Assessing your current and expected future tax rates and needs will help you decide which account is right for you. And what worked this year may not be the right choice next year, so you should review your tax and retirement savings strategies regularly.
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What is a Roth conversion?
Just because you put money into a traditional IRA doesn’t mean it has to stay there. A Roth conversion allows you to move money from a pre-tax retirement savings account into a Roth. You will have to pay taxes on the money to convert it, but then it grows tax-free.
If your income is higher than the income limits for contributing to an IRA, you can contribute to a traditional IRA and convert the funds later to a Roth account. This is called a “backdoor Roth IRA.”
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