betterment-investing

Roth or Traditional contributions? What’s better for you.

I’ve had a few people ask me now what the difference is between Roth and Traditional retirement plans so I wrote up this general overview to help.

In order to decide which is better for you, you’ll need to understand the differences between them and how they impact your taxes.

* Roth – You pay income tax on the money now, your money grows tax free, and you withdraw it tax free during retirement
* Traditional – You don’t pay income tax on the money now and your money grows tax free, but when you withdraw it you pay tax.

So essentially you’re deciding when you want to have to pay tax on your money and this is a huge benefit for those who understand it.

In the United States we have what are called Tax Brackets and which one you fall in is determined by how much you make.
Here is a table with the early brackets for the 2016 tax year (for single filers)
Taxable Income | Tax Rate
—————|———-
$0—$9,275 | 10%
$9,276—$37,650 | $927.50 plus 15% of the amount over $9,275
$37,651—$91,150 | $5,183.75 plus 25% of the amount over $37,650
$91,151—$190,150 | $18,558.75 plus 28% of the amount over $91,150

Here is a complete list of the current income limits associated with the [2016 Tax Brackets](https://www.irs.com/articles/2016-federal-tax-rates-personal-exemptions-and-standard-deductions)

The “goal” here is to pay as little tax as possible on contributions to your IRA, 401(k), TSP, or similar retirement plans.

If you’re in the lower tax brackets now, say 15-25% and lower, it would be a good idea to go with Roth contributions because you’re not likely to get into a lower tax bracket later in life.

However if you’re currently in a 30-35% or higher bracket it’s quite possible that you will be in a lower tax bracket when you retire and you would benefit more by making Traditional contributions.

Now, no two persons finances are exactly alike and it will take a little bit of research on your part to figure out exactly what contributions make the most sense for you, but I hope this at least gives you an overview of the main idea and points you in the right direction for determining what is best for you.

Posted in Saving Money and tagged , , , , , .

Shawn

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