Many articles compare the two main types of IRA’s, Traditional and Roth, trying to decipher which is better. I think the answer is they are both good, and you don’t need to choose between the two. You can invest in both types concurrently or you can switch back and forth for maximum benefit as your life and income level changes. Don’t stress too much over which to choose, the fact that you’re considering investing in either is a good thing. I recently opened a Roth IRA for my daughter who will be entering college this fall. As I said, while investing in either type is a good thing, I thought I would share my thought process for why I chose a Roth IRA at this point in her life.
If you compare Roth and Traditional IRA’s, they have many similarities. Maximum yearly contribution amounts are the same and both are tax advantaged, Roth for tax free growth, and Traditional for pretax contributions. Therein also lies the major difference that will impact which is better for you at different stages of life. Of course, everyone’s situation is different, so my opinions are just general guidelines to think about as you consider which type of IRA may be best for you.
Back to my college age daughter. She is working part time babysitting, making decent money and thankfully saving a lot of what she has earned. I suggested putting some of her savings into an IRA, to begin investing for the long-term. We decided on a Roth IRA. While she will forgo the tax deductibility of contributions to a Traditional IRA, being a college student with limited part time income (i.e. a lower tax bracket), the tax benefits are not that significant given her current earning potential. Looking ahead, once she graduates college and starts full time employment, her income should go up (we hope!). Perhaps then she will switch to funding a Traditional IRA to take advantage of the pretax contributions, while letting her existing Roth IRA continue to grow tax free. And God willing, once her income reaches a level where the pretax contribution benefit is phased out, she can then switch back to funding her Roth IRA and continue the benefit of tax-free growth, albeit with after tax contributions.
A lot of back and forth, and I am not trying to confuse the issue. I just want to make the point that saving for the future does not need to be an either-or decision when it comes to retirement accounts, and that both account types have their pros and cons, which can fluctuate as your income changes.
Proverbial Living 