Have you saved for 2016?
April 15th looms and for those of you who haven’t saved for 2016, time is running out. As if that pressure isn’t enough, you have to decide what kind of retirement account to use.
Roth IRAs allow you to put up to $5,500/year in ($6,500 if you are 50 or over). The money you put in has no tax write off today, but the growth is tax free when you withdraw at retirement. You need to have the money in the account for a minimum of 5 years or until age 59 ½, whichever is longer in order to access the growth tax and penalty free.
Money you contribute to a Roth can be accessed at any time with no taxes or penalties. So, if you put $10,000 in a Roth IRA and the account is worth $20,000, you can withdraw the first $10,000 without taxes or penalties regardless of your age.
Not everyone can contribute to a Roth IRA. Like any benefit the IRS gives, there are income limits on who gets to enjoy them. The income limits start at $117,000/year for single folks and go up to $187,000/year for married couples in 2016. (Click here for more details.)
Traditional IRAs are the original players in the retirement account game. The money you contribute (same limits as above) can be deducted from your income taxes as long as you don’t have access to a workplace retirement plan and fall under IRS income limits. (Visit the the IRS website for the income limitations.)
Growth in the Traditional IRA does not generate a current tax bill, but you will pay taxes at your regular income tax rate when you withdraw the money at retirement.
Which is best?
It’s hard to say because we don’t know what your tax rate in retirement will be compared to now. If you know you tax rate is higher now than in retirement, go for the tax-deferred option. If you suspect you will have same or tax rates in general will be higher in your retirement, you might like the Roth better.
Since we don’t know future tax rates any more than future investment returns, it’s a good idea to have a mix of both Traditional and Roth retirement accounts. That way, you are ready for anything!