Traditional IRA vs Roth IRA

Are you looking at an individual retirement account (IRA)? Trying to decide whether to go with a traditional IRA or Roth IRA?

The type of IRA you choose can have a major impact on your family’s long term savings. Knowing the differences between the two is important to select the best one for you. 
Income Limits 

Anyone under 70 ½ and has earned income can contribute to a Traditional IRA. The deciding factor on whether the

contribution is tax deductible depends on whether you or your spouse are covered by a retirement plan through work, such as a 401K or Pension Plan. If you have a Pension plan through work you can consider a 457 plan. 
Age is not a factor in regards to a Roth IRA; however, they do have an income-eligibility restrictions. For 2018, a single filer for example must have a modified adjusted gross income of less than $135,000 to contribute to a Roth IRA.  

Tax incentives 

Both options over a substantial tax break. Though the time in which you get the tax break is different. Traditional IRA contributions are tax deductible for both state and federal for the year in which you make the contribution; withdraws at retirement are taxed at ordinary tax rates.  
Roth IRAs do not provide a tax break at the time of contribution; however, your earnings and withdraws from the account are normally tax-free. Due to this a Roth IRA has an advantage of the time value of money and tax-free growth of earnings, especially since you are in a lower tax bracket at this time. 

Withdraws 

Both have major differences on when your savings must be withdrawn. For a Traditional IRA you are required to start taking minimum distributions at the age of 70 ½, whether or not you need the money.  
A Roth IRA doesn’t require any withdraws during a lifetime. So if you do not need the money you can let it stay in the account and continue to grow. This makes it an ideal option for wealth transfer. 
Both options allow you to begin taking penalty-free qualified distributions at age 59 ½. 
Other considerations 

The contributions to a Traditional IRA usually lower your taxable income in the contribution year. Also, if you are under 59 ½, you can withdraw up to $10,000 from the account without the normal 10% penalty to pay for qualified first-time home buyer expenses and qualified higher education expenses. 

Roth contributions, not including earnings, can be withdrawn penalty-free and tax free at any time even before 59 ½. If you are under 59 ½ you can withdraw up to $10,000 of the earnings penalty-free to pay for qualified first-time home buyers expenses, provided that it has been five tax years past your first contribution.  

The decision on which one basically depends on how you think your income and tax bracket will compare to your current situation. It is hard to predict what the tax rates will be in 10, 15, or 40 years from now. With the recent federal tax change to the tax rates economist believe the tax rates will rise in the future. This could mean that a Roth IRA may be the better choice long term.