Roth vs. a traditional IRA
Alright, I’ll admit it, I don’t have a Roth IRA. I have a regular IRA instead. I’ve been considering jumping on the Roth bandwagon, but wanted to check things out for myself first. So I went and took a look at the IRS’s Publication 590, Individual Retirement Arrangements. Here is the chart I came up with to help me decide after checking out the details for each type of IRA in that publication:
| Question | Roth IRA | Traditional IRA |
| Are contributions deductible? | No | Possibly |
| Are contributions reported on tax return? | No | Yes |
| Are distributions taxed? | No, for qualified distributions | Yes, but there are some exceptions |
| Are there penalties for early distributions? | Yes, 10% for non-qualified distributions | Yes, 10% |
| Is there a maximum contribution amount? | Yes, it varies | Yes, it varies |
| IRA can be rolled over into ____? | Another Roth | Possibly a Federal Thrift Savings Fund, section 457 plans, and section 403(b) plans |
| Accepts rollovers from ____? | Another Roth | Other traditional IRAs, an employer’s qualified retirement plan, section 457 plans, and section 403 plans |
| Are minimum distributions required? | No | Yes, beginning the year you reach age 70½ |
Based on this information, it seems like the main benefit of a Roth over a traditional IRA is that you’re not taxed on distributions from the Roth. To see whether or not this would likely benefit me, I used this Roth vs Regular IRA Calculator. Unless my circumstances change significantly, at this point it looks like I will likely come out the slightest bit ahead by keeping my traditional IRA (because my marginal tax rate is likely to remain unchanged in retirement, and I meet an exception which means that not all of my distributions from my traditional IRA will be taxable.) It’s almost a wash though, which means that I may still consider switching to a Roth because there are no minimum distributions required at a certain age. Of course, this leads to more questions if I decide to switch: do I just open a new Roth, and begin contributing to it, or do I consider converting my existing IRA to a Roth, and if so, when? It looks like more research is in order.
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May 1st, 2007 at 5:42 pm
For me, I feel that the Roth is going to benefit me the most. I have my vanguard account set to maximize.
May 2nd, 2007 at 7:01 am
One more thing to consider in the advantage column of a Roth IRA. Its going to be simpler to figure out your taxes. If you have a basis in your traditional ira and begin taking out withdrawals, you will need the documentation to prove that you do not need to pay taxes on those withdrawals again. With the Roth IRA this won’t be an issue. If its a wash, I would seriously think about a Roth. Between the easier taxes and no required withdrawals its a pretty good option.