The debate rages on between Roth and traditional. The question is always whether to invest in a Roth or traditional account. But that implies that you should or can only invest in a Roth OR traditional account. It's best to consider investing in a mix of Roth and traditional retirement savings vehicles.
First, to explain. The distinction between Roth and traditional accounts is how they’re taxed:
- You pay taxes on Roth contributions prior to depositing into the account. You pay no taxes upon withdrawal of the contributions and their earnings in retirement.
- Traditional contributions are pre-tax.When you withdraw funds in retirement, they will be taxed as ordinary income.
In general, Roth accounts are advantageous when you expect to be in a higher tax bracket when you retire. Conversely, traditional accounts make sense when your tax bracket will be lower in retirement. That advice necessitates planning for this before starting your first employment, a set in stone retirement plan, and switching from Roth to traditional, when your income eventually increases overtime.
Consider this: If you take a dualistic approach, which means that you contribute to both accounts at the same time, you have flexibility in retirement to deal with your taxes. Consider this:
- If you're retired and want to withdraw $200,000 for living expenses, congratulations! If you have a combination of Roth and regular retirement savings, you can use the conventional account up to the top of your tax bracket and withdraw the remaining sum from a Roth account.
- You'll only pay income tax on the regular distribution if you withdraw your Roth funds before retirement.
However, don't ignore your requirements today at the cost of future flexibility. If you need additional money that you'd lose if you contributed to Roth accounts, or if you need to keep your taxable income low now in order to assist your children with financial aid at school, only traditional 401(k) and IRAs may be an option for you.