When is a Roth IRA Better Than a Traditional IRA?

Both a Roth IRA and a traditional IRA areduring their retirement years. This favors making
government qualified retirement savings plans. Buttax-deductible contributions while working and
the Roth IRA tax properties of one can be asubject to higher marginal tax rates and
better deal for some people than those of thewithdrawing under low marginal tax rates in
other. This article lists their tax properties andretirement. And the relatively lower is your
who may benefit most from a Roth.retirement marginal rate compared to your
Roth and traditional IRAs illustrate the two wayscontributing marginal rate - the better. And that's
that these government-regulated retirement planstrue for both higher and lower earners.
offer tax-advantages geared to foster saving forBut if you're a higher earner and will have a high
your retirement from working income. Theretirement income using a traditional IRA you'll lose
traditional IRA, as for most qualified plans, isa lot of its benefits to high marginal tax rates in
advantaged by tax-deductible contributions andretirement especially under the forced MRDs. But
tax-deferred growth of those contributions.higher earners are limited or prevented from
But withdrawals of all this 'untaxed' money duringcontributing to Roth IRAs to dodge this
retirement are subject to income tax as theycircumstance.
come out. Income tax rates are progressive soThose with high retirement income probably also
where your income is high, marginal tax rates willtypically have high savings. So they're not
rob a significant fraction of your withdrawals.necessarily in need of pulling money out of their
Further aggravating this tax loss is that traditionalIRA - traditional or Roth - for retirement living. To
IRAs - as with most qualified plans- are subject tothem the Roth IRA serves as the perfect - and
Required Minimum Distributions (RMDs) after yourbetter- investment. It grows tax free and you
turn 701/2. And RMD rules increase the requiredneedn't withdraw from it. And if you do withdraw,
withdrawal as you age.high marginal tax rates won't affect your tax-free
Roth IRAs are tax-advantaged - on the otherwithdrawals.
hand - by tax free growth of contributions andSo the Roth IRA would serve their purposes
tax free withdrawals. The drawback is that theybetter. But getting money into a Roth IRA for
can only be funded by after-tax contributions. So,high earners is the problem.
it's more difficult to contribute to a Roth IRA forRecent legislation has allowed higher earners to
a given income - and more so the higher yourconvert qualified plan money to a Roth IRA in
income is.2010 - though direct contributions from their
But in addition to tax-free withdrawals, Roth IRAsworking income are still restricted or not allowed.
have no RMDs. This allows you to leave yourConversion of will require paying income tax on
money in your Roth IRA to enjoy the benefits ofany qualified plan money transferred to a Roth
tax-free growth.IRA.
Both tax-deferred and tax-free growth allowsAs an incentive to convert under the legislation,
investment earning to grow faster - at a higherany amount converted during 2010 and be split so
compounding rate than 'annually taxable'that half is taxed in 2011, and half in 2012. That
investments. And higher potential compoundingcan help lower the tax loss to convert.
rates are a significant advantage of all qualifiedHigh earners who contributed to traditional IRAs,
plans have over investments subject to 'annualwho have a lot of savings, and who may not
taxation'.wish to tap their IRAs during retirement but leave
Typically, people have a higher income during theirit for a legacy ought to find a way to convert as
working years when they make contributions totax-efficiently as possible to a Roth.
their qualified plans. And have a lower income