Daily Deduction: Roth vs. Traditional IRAs

The primary purpose of an IRA is to save money for your retirement. So how do the traditional and Roth IRAs compare when you reach that promised land? The usual rule is that distributions from a traditional IRA are taxable, while distributions from a Roth IRA are not. Furthermore, participants in traditional IRAs are required to receive distributions from their accounts, whether they want to or not. Participants in Roth IRAs are not required to take any distribution at all.

So how should you choose between these two options? If you expect to be in a lower tax bracket in retirement, the traditional IRA might be the best path. However, if you are paying lower taxes now but are expecting an inheritance or career promotions to increase your income later, a Roth might be for you. Or, to be more cynical, if you expect Congress to raise taxes in order to cover the astounding federal debt, Roth is your winner.

Finally, if you expect to die rich, the Roth is a better choice for your heirs. You aren't required to take minimum distributions from your Roth account, which will preserve your account balance. And when your heirs receive distributions from your account, they will be tax free, just as if they had been paid to you.

Of course, you can always hedge your bets by funding both a traditional and a Roth IRA. Your choices about how much money to put where may vary from year to year. Contribution limits, your tax bracket, your concerns about large future expenses and your predicted retirement tax rate should all play a role in your yearly decision.