Deciding Between Roth or Traditional Self-Directed IRAs

There more than one type of self-directed IRAs out there. Most of us have heard of a few of the most important types of retirement accounts, like the Individual Retirement Plan which is more commonly referred to as an IRA. An IRA is one of the most effective ways to save for retirement.

If you are wanting to start saving for your retirement but aren’t quite sure whether a Traditional IRA or Roth IRA is the right choice for you? The following four factors can really help you decide which type of IRA account it right for you.

Factor 1 Age

One of the differences between a Traditional and Roth IRA is when they deliver their tax savings. A Traditional lowers your taxes today while a Roth IRA saves its tax benefit for retirement. This is a big factor in deciding which account is right for you. The closer you are to retirement the more a Traditional IRA makes sense. Those who are younger have a lot longer to accumulate monies in their IRA and thus can have tax savings on a lot more money.

Factor 2 Income

Your income is a super important factor in deciding between a Traditional or Roth IRA. Depending on how much you earn, you might not have a choice as to whether a Traditional or Roth is better for you because as of 2014, you can’t use a Roth IRA if you are single and earn more than $129,000 or married and earn more than $191,000 as a couple.

Factor 3 Access to the money

If you are concerned about needing the money in your IRA before you reach retirement then there are some things to be aware of. Because an IRA is a retirement plan, the money should stay in the account until you turn 59 1/2. Generally, if you wanted to take money out of an IRA account you could owe income tax plus an extra 10% penalty on the withdrawal. While we could talk about some of the special situations that allow you to avoid the penalty we will leave that for another time.
While there are these restrictions the Roth IRA still gives you some extra access to your money. Since taxes and penalty only apply to pre-tax income you can take out all of your contributions in a Roth IRA and not owe anything to the IRS. It is only when you take out your investment gains that tax and penalty apply. All things considered here, a Traditional IRA is much more restrictive when it comes to taking out money and you’ll be hit with much more fees and taxes.

Factor 4 Retirement tax rate

One of the last factors to think about is your expected tax rate while in retirement. Do you plan on staying at the same tax rate during retirement or do you foresee it dropping?

If you expect to be in the same or higher, then a Roth IRA makes more sense. If you expect to be in a lower tax bracket, the Traditional IRA makes more sense. This can be a lot harder to know and because of this shouldn’t be one of your top factors when deciding between a Traditional or Roth. If you do happen to foresee a lot higher bracket in retirement then a Roth is more sensible. If you foresee a lower tax bracket then a Traditional is more sensible.

These are some of the most common factors to think about when deciding between the two types of IRA accounts. One great thing about self-directed IRAs is that you can have either a Traditional Self-Directed IRA or Roth Self-directed IRAs. At Accuplan Benefits Services we can help set up your account in minutes to get you investing in non-traditional assets.