Roth IRA vs. Traditional IRA: Which Is Right For You?
Updated: May 5, 2020
Which is right for you?
Although Traditional IRA’s and Roth IRA’s can both be outstanding investment methods, it is important for one to decide which one is right for them. To illustrate this example better, we are going to use our friend John Doe as an example. For John to understand which type of IRA is right for him, he should ask himself this question. Upon retiring, when I start to draw out of my investment accounts, do I anticipate that my tax rate will be higher than it is right now?
If John answered “yes.”
If John answered yes, a Roth IRA would be right for him. When investing in a Roth IRA, he is contributing after-taxed money. Once John retires and starts drawing from his investment accounts, he will be tax-exempt from the withdrawals. John, being in a higher tax bracket upon retiring, paid taxes on the money when he made contributions because he was in a lower tax bracket at the time.
If John answered “no.”
If John answered no, a Traditional IRA would be right for him. When investing in a Traditional IRA, he is contributing with pre-taxed money because he is taking the tax exemption when contribution instead of when withdrawing. Once John retires and starts drawing from his investment accounts, he will pay taxes from these withdrawals. John, being in a higher tax bracket in his working years, decided to pay taxes on the money when he withdrew his investments because he is in a lower tax bracket now that he is retired.
Here is an extra table to illuminate the subject more:
If you have any questions, comment down below!