Which IRA is better, Roth or Traditional?

I have heard that it's good to invest in both the 401K and an IRA. Right now I have the 401K down but need some advise regarding a Roth or Traditional IRA. I'm not exactly sure which would be better to invest in. I would be doing a joint investment with my husband. What are the differences between the two? Any impute would be greatly appreciated!

Unless the rules have changed, if you invest in a 401k you can not also invest in a traditional IRA. You can invest in a Roth IRA. The differences between the two is that after tax money goes into a Roth IRA, before tax money goes into a traditional IRA same as a 401k. All money earned by a Roth IRA is tax free for ever. All money removed from a traditional IRA is taxed.

In my opinion it is much better to invest in a Roth IRA than a traditional IRA because of the tax treatment of withdrawals. But a lot depends on your tax bracket. All money withdrawn from a Roth IRA is tax free. All money withdrawn from a traditional IRA and a 401k is taxed completely at the full tax rate.

Let us assume that you have invested for 40 years into a 401k or a traditioanl IRA and you have over $2 million in the accoun earning 200,000 a year. You will have to withdraw at least $250,000 a year at age 70 1/2. You may be paying 33% tax rate on the withdrawals. Not good.

In simple terms:

Roth IRA = tax free withdrawals after age 59 1/2
Traditiona lRA = taxable withdrawals and contributions you make are tax-deductible.

Both IRAs grow tax-deferred.

everyone already has given you the answer to the traditional vs. roth, so the only thing I need to point out is that you CANT do a joint investment with any type of IRA. The 'I' stands for 'individual' & therefore, you cant have a joint person on it. You can only have a beneficiary.

Roth IRA is much better. For example if you are 29 and invest $3000 a year into a traditional ira your contribution is tax deductable. If you are in a 33%(Federal&State combined) tax bracket you would have $1000 of tax savings a year and when you reach 59 1/2 you would have a total of $30,000 tax savings not paid to the IRS. Sound good. Let's say you got an average of 12% (typical mutual fund average)on the money you invested it would now have a balance of about $500,000. If you did not want to deplete the money and make it last you would have to withdraw the interest that this amount your earning. Let's say you are getting 10% which would mean your withdrawing $50,000 a year without depleting the retirement account. If taxes stay the same and don't go up 33% of that money would have to be paid to the IRS or about $15,000. In 2 years of retirement you pay back 30 years of tax savings. Imagine if you lived to 89 you would have ended up paying $450,000. How does that make you feel? What if you invested $3000 a year into a ROTH IRA. A ROTH IRA is different and allows to take out your money tax free during retirement because you fund it with after tax dollars. You would get to withdraw your $50,000 a year and not pay a dime of taxes. The catch is you don't get $1000 a year in tax savings. These are called qualified plans because they are qualified with the IRS. Do you want Uncle Sam planning your future. I would say a ROTH IRA is definitely much better because it provides you with more money at retirement which is the whole plan of setting up a retirement account anyway. It's not about how much interest your earning but how much interest your earning after taxes that really makes the difference. Also for the majority of people find themselves in a higher tax bracket when they retire for several reasons such as the mortgage is paid off and their kids have moved out of the house. This is your life and retirement plan and is something you should consider very carefully and research very thoroughly. I hope this helps!
Aloha

It will depend on your tax situation. If you actually make enough to pay income taxes (not just payroll) then a traditional may be better. Do you itemize on your taxes? If not, you may not have enough deductions, even with the IRA contribution. Talk to your tax advisor.

If taxes aren't an issue, then the Roth would be the better choice. While it doesn't provide a tax deduction now, the proceeds will be tax free upon retirement, unlike the traditional, which will be taxed.

Max out your 401k before you do either of these.

Do you expect your income tax rate to be higher or lower when you retire than it is now?

If you think your rate will be higher when you retire, then the Roth is the better deal. You pay taxes now at the "low" rate, then take the proceeds out tax-free.

If you think your rate will be lower when you retire, then the traditional IRA is better. You pay no taxes now on the money you put in then pay taxes at the lower rate when you take it out.

Well, if you are already contributing to a 401(k), you cannot get a deduction for contributing to a traditional IRA, which defeats the benefit of the traditional IRA over the Roth IRA (a current deduction for your contribution). From a tax standpoint, your best option would be to max out your 401(k) if you are not already doing so. If you are already maxed out on your 401(k), that is you are already contributing the annual limit of $15,000, then you could consider making a nondeductible contribution to either a traditional or a Roth IRA. Only the earnings in the IRA account will be taxable when you withdraw it.

Traditional - Tax benefit on the front-end. Contributions are deducatable but the withdrawls are entirely taxable when taken out.

Roth - Tax benefit on the back-end. Contributions are not deductable but all withdrawls are tax-free assuming the condtions are met.

Since you are convered by a 401k at work, you may not be able to do a deductable tradtional. The income limits are a bit low.

From Investopedia:

Traditional IRA
http://www.investopedia.com/terms/t/traditionalira.asp

Roth IRA
http://www.investopedia.com/terms/r/rothira.asp

There are alot of factors to consider before you can decide which IRA is for you.

Contribution Age Limitations
If you want to be able to contribute to your IRA for as long as you like, you need to consider the age limits placed on IRA contributions. You may not make a participant contribution to a Traditional IRA after and for the year you reach age 70.5. For Roth IRAs, there is no age limit.

Income Limitations
One factor that determines whether a Roth or Traditional IRA is better for you is your income, which dictates your eligibility to contribute to a Roth IRA. To be eligible, your income must be the following:

no more than $160,000 if you are married and file a joint tax return.
no more than $10,000 if you are married and lived with your spouse for any period during the tax year, but filed a separate tax return.
no more than $110,000 if you file as "single", "head of household" or "married filing separately" and did not live with your spouse at any time during the tax year.

If your income exceeds the amounts indicated above, you may not contribute to a Roth IRA. In addition, your Roth IRA contribution limit may be lowered if your income falls within certain ranges (between a certain amount and the income limits listed above). Consult with your tax advisor to determine the maximum amount you may contribution to a Roth IRA. (See Roth IRAs).

Income caps do not apply to Traditional IRA contributions.

Required Minimum Distributions
If you don't ever want to be required to start distributing your retirement assets at any time, you need to consider the IRA rules for required minimum distributions (RMD). With a Traditional IRA, you must begin to take RMDs by Apr 1 of the year following the year you reach age 70.5. This means you must gradually reduce your IRA balance and add the distributed amount to your income, even if you are not in need of the funds.
Roth IRA owners are not subjected to RMD rules.

Tax Treatment of Distributions
The tax treatment of distributions is a big factor that determines whether the Roth or Traditional IRA is better for you. Generally, distributions from a Traditional IRA are treated as ordinary income and may be subject to income taxes; furthermore, the distributed amount may be subjected to early-distribution penalties if the amount is withdrawn while the taxpayer is under the age of 59.5.

On the other hand, qualified Roth IRA distributions are tax and penalty free. Roth IRA distributions are qualified if they meet the following two requirements:

The distributions are taken no earlier than five years after the taxpayer funds his or her first Roth IRA. This five-year period begins with the tax year for which the first contribution is made. For example, if you make a Roth IRA contribution in April 2005 for tax year 2004, your five-year period begins January 1, 2004, because the contribution was made for 2004.
The distribution is taken as a result of any one of the following:
You have reached age 59.5.
You are disabled.
Your beneficiary receives the distribution upon your death.
You purchase a first home (subject to a lifetime limit of $10,000).
From a general tax perspective, the Roth IRA is the better choice if your tax rate during retirement will not be lower than your current tax rate, as the Roth IRA allows you to pay the taxes now, and receive tax-free distributions when your income tax rate is higher. If your tax rate will be lower during retirement, then the Traditional IRA may be the better choice if you are eligible to receive a tax deduction now when your tax rate is higher.

Splitting Your Contribution
If you are eligible to contribute to both types of IRAs, you might want to divide your contributions between your Roth and Traditional IRA; however, your total contribution to both IRAs still must not exceed the limit for that tax year (plus the catch-up contribution).

If you decide to split your contributions between both types of IRAs, you may choose to contribute the deductible amount to your Traditional IRA (see Traditional IRA Deductibility Limits) and the balance to your Roth IRA. Let's assume for example that the maximum amount you could have deducted for the 2005 tax year was $2,000. You could've contributed $2,000 to your Traditional IRA and the balance of $2,000 to your Roth IRA.

Before splitting your IRAs, however, consider additional fees, such as maintenance fees charged by your IRA custodian/trustee for maintaining two separate IRAs. Note also that placing bulk trades into one IRA instead of placing separate trades in separate IRAs could help you save on trade-related fees. Finally, consider the short-term benefits as well as the long-term benefits and decide which outweighs the other.

I would suggest speaking with a financial planner. They will help you determine whether there are other factors to consider that would make either IRA more suitable for your tax-related financial planning needs.

Key is what you put in the IRA as investment. Roth likely better but if you don't invest well outside of banks & annuities & the like both are bad. ADX PEO 2 classic holdings.

Roth IRAs are best if you are not making much money, and don't need a tax deduction. Roth IRAs can often be done in addition to other retirement accounts.

Traditional IRAs are best if you need a tax deduction for the the year you are contributing to them.

It is a bit tricky to figure which is better. With a Roth IRA there is no tax savings at the start. How much would that savings have earned over your lifetime if you had gone with the traditional? Is the loss of that savings offset by the tax a traditional IRA pays at the end? You may want to make a spreadsheet and see. Much depends on your tax bracket and years until retirement. Also I don't think you can convert a 401k to a Roth IRA without paying all the tax at transfer time.

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