Roth vs. Traditional IRA: Which is Better if You Have a Roth 401k?

Consider these factors when making the decision between a Roth and traditional IRA if you already have a Roth 401k.

What is a Roth IRA?

A Roth IRA is a retirement account that allows you to save money on a tax-free basis. This means that you do not pay taxes on your contributions or withdrawals. However, you must meet certain income requirements to contribute to a Roth IRA.

What is a Traditional IRA?

A traditional IRA is a retirement account that allows you to deduct your contributions from your taxable income. This means that you pay taxes on your withdrawals. However, there are no income limits for contributing to a traditional IRA.

Which is Better: Roth or Traditional IRA?

The best type of IRA for you depends on your individual circumstances. If you are in a high tax bracket now and expect to be in a lower tax bracket in retirement, then a Roth IRA may be a good option. This is because you will pay taxes on your contributions now, but you will not pay taxes on your withdrawals in retirement.

If you are in a low tax bracket now and expect to be in a higher tax bracket in retirement, then a traditional IRA may be a good option. This is because you will deduct your contributions from your taxable income now, but you will pay taxes on your withdrawals in retirement.

Other Factors to Consider

In addition to your tax bracket, there are other factors to consider when choosing between a Roth and traditional IRA. These factors include:

Your retirement goals. What are you saving for? Are you saving for a down payment on a house, a new car, or a comfortable retirement?
Your investment horizon. How long do you have until you retire? If you have a long investment horizon, then you may be able to afford to take more risk with your investments.
Your risk tolerance. How much risk are you willing to take with your investments? If you are not comfortable with risk, then you may want to choose a more conservative investment strategy.

Deciding Which is Better

Ultimately, the best way to decide which type of IRA is right for you is to speak with a financial advisor. A financial advisor can help you assess your individual needs and goals and make the best decision for your situation.

A Special Case for ACA Subsidies

If you are receiving subsidies for your health insurance under the Affordable Care Act (ACA), then you may benefit from having traditional funds that you can convert to Roth to maintain those subsidies. This is because Roth conversions are not counted as income for the purposes of ACA subsidies.

Conclusion

Choosing between a Roth and traditional IRA can be a complex decision. By considering the factors discussed in this blog, you can make the best decision for your individual circumstances.