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

Individual Financial Considerations Should Drive Your Decision

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?" The decision likely will depend on the answers to the following questions.

How old are you?
For both Roth and traditional IRAs, your maximum annual contribution is $5,500, or $6,500 if you're over 50. And if you choose a mix of the two, the contribution ceilings still hold. The most basic difference between the two types of accounts is when your contributions are taxed. With a traditional IRA, you can claim a tax deduction for the year you contribute; with a Roth IRA, your contributions aren't tax-deductible, but your withdrawals can be tax-free.

Where are you in your career?
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, 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.

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. The following applies to tax year 2015.

  • Single filers: If your average gross income is less than $116,000 per year, you can contribute up to the maximum amount. If you make between $116,000 and $131,000 per year, you can contribute a prorated amount. If your annual income exceeds $131,000 you are considered above the Roth IRA income limits.
  • Joint filers: If your average gross income is less than $183,000 per year, you can contribute up to the maximum amount. If you make between $183,001 and $193,000 per year, you can contribute a prorated amount. If your annual income exceeds $193,000 you are considered above the Roth IRA income limits.

There are no income limits for contributions to traditional IRAs, however, there is no tax deduction for your contributions if your income exceeds government-set limits. Get all the details on the IRS website and be sure to consult a tax professional familiar with your situation.

Ally Bank Can Help You Choose
Whether you settle on a Roth IRA or a traditional IRA (or a combination of both), Ally Bank has options for you to consider—all with no annual fees and the security of Federal Deposit Insurance Corporation (FDIC) insurance up to the maximum allowed by law.

Learn more at Allybank.com or call live, 24/7 customer care at 877-247-ALLY (2559).

Ally Bank, member FDIC