Investments Retirement

Q&A: Should I contribute to a Traditional retirement account or a Roth retirement account (IRA/401k/403b)?

The main difference between Traditional and Roth retirement accounts is when the money is taxed; traditional retirement account contributions are pre-tax (not taxed now, but will be taxed later when taken out) while Roth contributions are after-tax (taxed now and not taxed later when taken out). So, the answer to this question depends on the answer to the following: Am I in a higher tax bracket now than I will be later? If you are, then a traditional account would be better to defer the income to a lower tax bracket later.

So if your tax bracket is the same now as it will be when you withdraw the money you contributed, it’s a wash and it doesn’t matter which one you choose, from a tax standpoint.

Some things to consider:

Government policy
Tax brackets can change when tax laws change.

Flexibility
Roth IRAs are much more flexible, being that contributions can be taken out whenever. But contributions to Traditional IRAs must stay in until age 59.5 (with certain exceptions). Roth accounts are also more flexible for beneficiaries when the original account owner dies.

Diversification
This concept is not only important for types of investments, but types of accounts as well. Having both traditional and Roth retirement accounts to pull from can be helpful for maximizing tax efficiency.

See also:
Q&A: What is a Traditional IRA?
Q&A: What is a Roth IRA?
Q&A: What is a 401k/403b?

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