Answering that question depends entirely on your projections for retirement taxes – something which cannot be known with certainty.
Typically, if you believe taxes will rise over time, traditional IRAs could provide the greatest tax benefit upfront. Conversely, Roth IRAs might be better for individuals expecting lower future rates.
Taxes
Traditional and Roth IRAs allow you to save for retirement tax-deferred, as well as providing access to a wider selection of investment choices than you might find within an employer-sponsored retirement plan such as 401(k).
If you anticipate falling into a lower tax bracket during retirement, a Roth IRA might make more sense for you than other options. While taxes must be paid upfront, earnings and withdrawals from it will remain tax-free.
Roth IRAs differ from traditional IRAs in that there are no minimum distribution requirements, starting at age 72 for their original owners. Nonspousal beneficiaries must take distributions over their life expectancies; this rule could shorten your heirs’ accounts. NerdWallet’s IRA calculator can help you select an account type appropriate to you – bank, online broker, robo-advisors all offer Roths. Tax implications depend on which kind of Roth you open and how it is invested.
Investments
IRAs can be an excellent savings vehicle, especially for those without access to workplace retirement plans. Offering access to growth stocks, mutual funds and ETFs – they provide investors with a comprehensive selection of investment options that could prove the perfect way to save for their retirement goals.
Growth-oriented assets may increase quickly in value, yet can quickly decline (lookin’ at you RDFN!). To decrease risk and mitigate it effectively, consider investing in a growth mutual fund or ETF with low costs and diversification capabilities.
Roth IRAs can also be beneficial to those who anticipate that their income tax rates in retirement will be higher than today, since withdrawals from a Roth are tax-free compared with traditional IRAs. Furthermore, dividend stocks that distribute regular distributions of profits tend to be taxed as ordinary income instead of capital gains – so by keeping them within a Roth you can avoid that tax hit altogether. You could even invest real estate through a self-directed IRA; though this account comes with additional fees and risks.
Withdrawals
By opening an IRA with a bank, brokerage firm or robo-advisor you can invest in stocks, bonds and exchange-traded funds. While investment IRAs typically provide higher potential returns than savings accounts they’re not FDIC-insured and still present the same risks as any investment vehicle.
Many individuals discuss whether to choose a traditional or Roth IRA, with tax bracket being the main deciding factor. Unfortunately, however, trying to predict future tax brackets may be challenging and may not be an accurate way of making investment decisions.
No matter what kind of IRA you choose, tax breaks can help your funds grow more rapidly than they would through traditional taxable accounts. Use our IRA calculator to see just how the benefits add up!
Fees
No matter which retirement savings vehicle you select, it’s essential that you understand all associated fees. Fees such as annual account maintenance costs, early withdrawal penalties, trading commissions and mutual fund expense ratios could add up over time and significantly diminish returns. These expenses include annual account maintenance charges, early withdrawal penalties and mutual fund expense ratios – common expenses related to an IRA account.
Steps taken to minimize fees can help ensure that your money lasts throughout your lifetime and helps build an after-tax savings snowball when retirement arrives. In addition to making consistent contributions, it’s crucial that you review and compare brokerage accounts and investment options to locate those with lower fees.
Roth IRAs offer several key advantages over traditional IRAs, primarily their tax-free withdrawal feature and ability to withdraw contributions without paying taxes or penalties on them. But it can be difficult to know for certain what your tax rate will be at retirement; if this seems likely, a traditional IRA might be best.
