Whether retirement is decades away or a few years off, the changes you make to your investment plans can have a significant impact on your post-retirement lifestyle. One big question many investors have is about Roth IRAs and traditional IRAs. Specific state and local regulations can also affect your saving strategy, so choose a New York accountant with a thorough understanding of how state laws intersect with your investment strategy. It’s best to seek the input of a qualified financial adviser before making investment decisions, but this quick guide will give you useful suggestions to discuss with your CPA.

What Makes a Roth IRA Different?

Before choosing between a Roth or a traditional IRA, you first need to know how they differ.

• Roth IRAs have restrictions on contributions based on income; if you earn as much or more than $196,000 in adjusted gross income ($133,000 if filing singly or separately) during 2017, you are not eligible for a Roth IRA.
• Traditional IRAs are available to contributors who are younger than 70 ½ years old, while Roth IRAs do not restrict contributions by age.
• While traditional IRAs are tax-deductible in the year during which you make contributions, Roth IRAs are not. Instead, they allow you to take tax deductions when you retire and begin using the funds.

Which Is Best for You?

The difference in when contributions are taxed is a key factor in deciding whether to participate in a Roth or traditional IRA. If you expect your current tax rate to decrease by retirement age, then a traditional IRA might make more financial sense, allowing you to claim deductions now while your tax liability is higher. If your projected tax rates are likely to remain the same or increase as you approach retirement, then a Roth IRA could be for you. Typically, this means you would opt for a Roth IRA when starting your career in a lower tax bracket and a traditional IRA when you are at the peak of your earning potential.

Deciding between IRAs becomes a more complex question if you have changed career tracks or work in a field with high income variability from year to year. If you are unsure about how to allocate contributions, your financial consultant can help.

Calculating Contribution Amounts

Depending on your age and adjusted gross income, you may be able to contribute to both types of IRA. Calculating the optimal contribution for either account type or both is somewhat subjective; you and your CPA can discuss your retirement plans and how you will meet or exceed your savings benchmarks as you approach retirement. The IRS caps contribution amounts and establishes deadlines for contributions each year. The IRS website features an overview of Roth and traditional IRA contribution information, but as this information is subject to change, your financial adviser can coordinate your contributions to ensure full compliance and the best value for your retirement strategy.

Penalties, Early Withdrawals, and Other Considerations

Both IRA types are meant for retirement, and early withdrawal can incur penalties or additional taxes. Withdrawing from a traditional IRA before age 59 ½ costs as much as 10 percent in early withdrawal penalties, and the money is taxable at the current rate. A Roth IRA account does permit withdrawal of initial contributions without penalty, but earnings are subject to the same 10 percent penalty and taxation as with a traditional account. There are exceptions to these penalties, but only when qualified by the following penalty-free withdrawal conditions:

• First-time home buying, building, or rebuilding
• Higher education costs
• Medical expenses and health insurance premiums under special conditions
• Inherited IRAs

Other exemptions may apply, but to preserve as much of your contributions and earnings as possible, speak with your CPA and discuss your options.

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