How to Save With an IRA - Choose a Regular IRA or Roth IRA

Step 2: Regular IRA or Roth IRA, Chose Which Is Best for You.

Choose a Regular IRA or Roth IRA is the second article in the How to Save For Retirement With an IRA series. While both types of IRAs present excellent opportunities to save for retirement, choosing the right one is worth the effort. The IRAs differ in several ways including tax deductibility, taxation during retirement, and the impact of your current income. Your expectations for the future also play a role.

Tax Deductibility

A regular IRA  contribution may be tax deductible depending on your access to a workplace retirement plan, your marital status, and your overall income. (Is your regular IRA contribution tax deductible?) A Roth IRA contribution is never tax deductible.

Taxation During Retirement

When you withdraw money from your regular IRA, it is subject to ordinary income tax. However, you pay no tax on the growth or earnings in the account until it is distributed. As a result, a regular IRA is considered tax-deferred. Qualifying distributions from your Roth IRA, on the other hand, are tax-free.

Impact of Your Current Income

There is no limit to the amount you can earn and still contribute to a regular IRA. A Roth IRA, however, is subject to a maximum income limit which varies by year. See the current Roth IRA income limitations and annual limits.

Which IRA Should You Choose?

Numerous online calculators can help you make a reasonable educated guess as to which IRA to choose, provided you qualify for both.

By and large, if you feel your income tax rate is likely to be at least as high in retirement as it is today, lean towards a Roth IRA. Otherwise, consider a regular IRA.

Regardless, now is the time to open an IRA, the next part in the How to Save For Retirement With an IRA series.