Because I am nearing my senior years I ask, “How do I plan for retirement?” Having worked all of my adult life I now feel that I should be slowing down. When I started working I saved for my retirement by way of my Individual Retirement Account otherwise known as IRA. I am unsure, however, that I can sustain my pre-retirement lifestyle from the proceeds of my IRA, let alone survive. The government encouraged conversion to Roth IRA in 2010. Hence, my decision to weigh the advantages of the traditional vs. Roth IRA.
You may be asking, “What is Roth IRA?” Traditional IRAs provide that you get a tax deduction for your contribution but you have to pay taxes on the earnings of your account when you retire. Additionally, IRAs require you to make minimum distributions when you reach the age of 70 ½ otherwise you get penalized with taxes amounting to 50% of what should have been distributed.
In contrast the Roth IRA contributions grow tax-free and withdrawals after retirement are also tax-free. This is one of the key differences between the traditional vs. Roth IRA. However, contributions to the Roth IRA are part of your taxable income. In addition, in Roth IRA you do not have to withdraw any of your money at the age of 70 ½. You can leave your money in the account past that age without being penalized.
Roth IRA allows you to make your money grow and make distributions tax-free as long as you are at least 59 ½ years old at the time of distribution and have held the Roth IRA for at least 5 years. This may seem to weigh in favour of Roth IRA when it comes to weighing the traditional vs. Roth IRA.
But then there is a price to pay for conversion. The amount of money you convert into the Roth IRA is taxable as ordinary income. The reason for this is that your contributions to the traditional IRA account were exempt from taxes. The positive aspect to this is that any taxes you have to pay for the conversion can be paid over a period of 3 years starting in 2010. In addition, if you had invested heavily on stocks when the world market was down chances are your money did not earn very much. Should this be the case the tax due from converting your IRA may not be that much. And even if the tax due to conversion is considerable, there is a great chance that taxes will even increase in the years ahead. With Roth IRA, you are assured of tax-free withdrawals when you retire. This feature presents another big factor in favour of Roth IRA when considering the traditional vs. Roth IRA.
When you consider the value of each type of retirement plan, traditional vs. Roth IRA, also take into account how much time you have before retiring. If you are relatively young then the chance is that your income bracket is not that high and your taxes are computed at a lower rate than someone who is on a higher income bracket. Therefore the sooner you make the conversion, the better.
There is a possibility that you might be in the same boat as I am, asking the same question - “How do I plan for retirement?” This article then hopes to provide some answers.
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