4 Questions to Ask Yourself When Considering Roth vs. Traditional IRA

Individual Financial Considerations Should Drive Your Decision

August 2013

For almost anyone planning or building a retirement portfolio with an individual retirement account (IRA), the question comes up sooner or later:

"Roth vs. traditional IRA - which one should I choose?"

There is no wrong answer; each can be a good choice. But your decision depends on your circumstances and the answers to four questions.

Question 1: How old are you?

For both Roth and traditional IRAs, your maximum annual contribution is $5,000, or $6,000 if you're over 50. And if you choose a mix of the two, the ceilings still hold.

The most basic difference between the two is that you can claim a tax deduction for contributions to a traditional IRA. With a Roth IRA, your contributions aren't tax-deductible, but your withdrawals can be tax-free.

Question 2: Where are you in your career?

In the Roth vs. traditional IRA debate, financial planners generally favor the Roth IRA for people just starting out. "You've got years and years of tax-free growth," Nicholas LaVerghetta, a certified financial planner with NCM Capital Management LLC, in Ramsey, New Jersey, recently told Ally Bank in an interview. "In the long run, that outweighs any deductions you might get from a traditional IRA."

But LaVerghetta said the traditional IRA can make sense for those who start saving closer to retirement, or who expect their income to be significantly reduced when they stop working.

But in comparing Roth vs. traditional IRA pros and cons, there are other differences to consider.

Questions 3 and 4: What's your income? And your income-tax filing status?

You can't contribute to a Roth IRA if your income exceeds government-set limits. For tax year 2011, the Internal Revenue Service listed Roth contribution limits as follows:

  • If you're married and filing jointly, you can contribute up to the limit as long as your "modified adjusted gross income" (AGI) is less than $169,000. From $169,000 to $179,000 the amount you can contribute is reduced. If your modified AGI is $179,000 or more, you cannot contribute to a Roth.
  • Single filers can contribute the maximum if their modified AGI is below $107,000. From $107,000 to $122,000, their allowable contributions are reduced. And, when they reach $122,000, they no longer can contribute to a Roth IRA.
  • If you're married, filing separately, but lived with your spouse for part of the year, another set of limits apply. Get all the details on the IRS website.

Roth vs. Traditional IRAs: Ally Bank Can Help you Choose

Make too much money for a Roth IRA, and your decision is clear. If you're not covered by an employer-sponsored retirement plan, a traditional IRA comes with no income restrictions. If you're in an employer-sponsored plan, your tax deduction will be limited, and then eliminated once you reach income plateaus identical to those for the Roth IRA.

But whether you finally settle on a Roth IRA or a traditional IRA (or a combination of both that works for you), Ally Bank has IRAs for you to consider — all with no annual fees and the security of Federal Deposit Insurance Corp. (FDIC) insurance up to the maximum allowed by law.

Learn more at Allybank.com, or call live customer care at 877-247-ALLY (2559).

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