Interrupter CheckmarkInterrupter IconFacebookGoogle PlusInstagramGroupRamsey SolutionsTwitterYouTubeExpand MenuStoreCloseSearchExpand MenuBackStoreSign in
Skip to Main Content

We're Giving Away Cash! Enter to Win.


4 Minute Read

Do You Have the Right IRA for Your Retirement?

4 Minute Read

Dave has always been a fan of Roth IRAs for retirement investing (combined with a workplace retirement plan when it’s available). The tax-free benefits are just too good to turn down for most people. But it’s a good idea to know the differences between a Roth IRA and a traditional IRA and the few occasions when a traditional IRA can be a better choice.

Traditional vs. Roth: What Do They Have in Common?

First, let’s talk about how the two are alike.

traditional and roth IRA similarties

So far, IRAs probably don’t look like anything special. But we haven’t gotten to the good stuff yet.

Traditional vs. Roth: What Makes Them Different?

traditional vs. roth IRA differencces

Roth IRA Tax Benefits for (Nearly) Everyone

Make sure you catch that last difference, because it’s a big one. When you retire, the money you withdraw from a traditional IRA is taxable while the money you withdraw from a Roth IRA is tax-free.

Be confident about your retirement. Find an investing pro in your area today. 

A study by T. Rowe Price showed that the benefits of that tax-free retirement income make a Roth IRA a better choice for nearly everyone investing for retirement. “Even though the Roth IRA contribution doesn’t qualify for an income tax deduction, decades of compounding tax-free money can generate more spendable income in retirement,” the study concluded.(1)

For example, a 30-year-old investor whose income tax rate drops by 5% in retirement will still have 9% more spendable retirement income by using a Roth IRA rather than a traditional IRA. If his rate remains the same, as is the case with most retirees, he’ll have 17% more non-taxable income. Investors age 50 or older who experience a 6–10% drop in their tax rate could, however, be better off with a traditional IRA. “For investors nearing retirement, there isn’t enough time for the money to compound at a rate to counter the significant reduction in their tax bracket during retirement,” the study explained.

Talk through the pros and cons of each type of IRA with your investing professional so you can make the right choice for your situation.

Conversion Considerations

Anyone with a traditional IRA can convert it to a Roth IRA regardless of income or marital status. Converting isn’t complicated, but there’s one big factor to consider: taxes. When you convert your account, you’ll owe taxes on the entire balance.

To make conversion worthwhile, you’ll need to cover that tax bill out-of-pocket. Do not use funds from the IRA itself to pay the taxes! You’ll reduce the amount that goes into your Roth IRA, and, if you’re younger than age 59 and a half, you’ll have to pay the 10% early withdrawal penalty as well. At the least, you’ll lose more than a third of your available retirement dollars.

retirement funds available after 30 years of growth

An investor in the 25% tax bracket converting a $30,000 traditional IRA to a Roth IRA will have a $7,500 tax bill. If he chooses to pay the taxes from the IRA itself, it will cost him $10,500. After 30 years of growth, that decision could end up costing him more than $180,000! Talk about missing some spendable income!

You can also roll any old 401(k)s into a Roth IRA as well, but the same deal applies. You’ll have to pay taxes on the amount of pre-tax money you roll over.

Talk With an Investing Pro

Consult an experienced investing professional who can help you decide if now is the right time to convert or roll over your retirement accounts to a Roth IRA. Your investing professional can also help you choose the best mutual funds so you can take advantage of all that tax-free growth!

With our SmartVestor program, you can find investing professionals who will partner with you as you make important decisions about your retirement plan. Interview as many as you want to find the right pro for you! Find an investing pro today!

What Is Stock Trading?

Stock trading is like fishing—everyone wants to tell you about the time they caught “the big one,” but never about the ones that got away. Here’s why stock trading is a bad idea!

What Is a Money Market Fund?

Are money market funds worth being part of your investing strategy? And what in the world is a money market fund, anyway? Don’t worry, we’ve got all the answers you need right here!

What Is a Brokerage Account?

Think 401(k)s and IRAs are the only way to save for retirement? Think again! If you’re ready to invest beyond 15% of your income, a brokerage account might be one of your best options.

Common Types of Mutual Funds

Just like any other purchase, there are good financial products and there are bad financial products. You don’t want to just grab any old mutual fund off the shelf! Learn about types of mutual funds.
Thank you!  Your guide is on its way.

Build Long-Term Wealth 

Build Long-Term Wealth

Work with an investing pro and take control of your future.
Get Started

Build Long-Term Wealth

Work with an investing pro and take control of your future.
Get Started