6 Questions to Ask Yourself Before Deciding Between a Roth vs. Traditional IRA

Any time you begin a new investment journey, decisions must be made. So much information is thrown your way that it takes time to sort everything out. If you're considering a traditional IRA or Roth IRA, we've simplified the process for you by compiling the six most important questions you should ask yourself before determining which type of IRA will best serve your interest. Once you've worked through the questions, you should know which is right for you.

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1) Do I earn too much to contribute to a Roth IRA?

If your income is too high to contribute to a Roth IRA, a traditional IRA is still an option.

2) Do I earn too much to take the full allowable tax deduction on a traditional IRA?

If you're leaning toward a traditional IRA for the immediate tax deduction, make sure that your income makes you eligible.

Data source: Morningstar.

3) Do I expect to bring in more money in retirement than I currently earn?

If you add up all expected sources of retirement income and find that your annual income will be higher after retirement than it is now, you may want to reduce post-retirement taxes by investing in a Roth IRA.

4) Do I have time to meet the five-year rule if I'm considering a Roth IRA?

To enjoy tax-free withdrawals during retirement, you must meet two conditions: Be age 59 ½ or older and hold the Roth IRA account for a minimum of five years. If you're less than five years away from retiring, you need to consider at what age you'll begin to make withdrawals and whether you'll be able to meet the five-year rule.

5) How do I feel about required minimum distributions?

A traditional IRA requires you to begin taking a minimum distribution (RMD) when you reach age 73 (or 75 if you were born in 1960 or later). If you want to avoid RMDs and don't exceed the income limits, a Roth IRA may be more up your alley.

6) Is there any chance I'll need to borrow from my IRA before age 59 ½?

Contributions to a Roth IRA can be withdrawn, tax- and penalty-free at any time. However, earnings may be taxed and penalized if withdrawn before age 59 ½. As for the traditional IRA, early withdrawals of both tax-deducted contributions and earnings will be taxed and penalized.

Fortunately, you can avoid the 10% early distribution penalty if the money is used for certain purposes, such as higher education, unreimbursed medical expenses, or a first-time home purchase. This article lists many of the ways you can avoid the penalty. Just make sure that you understand all the rules, conditions, and limits. Also, note that these exceptions just allow you to avoid the 10% penalty; you'll still owe taxes.

In a nutshell

It's easy to drift into the weeds when deciding between a traditional IRA and a Roth IRA. However, the answer often boils down to whether you want to save on taxes now or would prefer to pay taxes on your contributions now and enjoy tax-free withdrawals in retirement.

Data source: Fidelity.

Once you determine which type of IRA offers you the best bang for your buck, it's just a matter of working with a broker you can trust to help get you started.