The selection of a Roth IRA or regular IRA is an important decision affected by several factors. A regular IRA is a tax-deferred account, meaning that your account is not subject to tax until you withdraw funds, ideally in retirement. Furthermore, a contribution to a regular IRA is tax-deductible, subject to certain income limitations.
A Roth IRA is a tax-free account. Although contributions are never deductible to a Roth IRA, the tax-free nature means that, provided you meet certain basic requirements like the five-year rule, you will never pay tax on the growth of your Roth IRA investments.
Factors Affecting Your Choice Between a Roth and Regular IRA
Tax Rates
If, compared to your current tax rate, you expect your tax rate in retirement to increase or stay the same, a Roth IRA is likely to be preferable. Generally speaking, a decrease in tax rates may makes the regular IRA more attractive.
Rate of Return
The higher the rate of return you anticipate in your IRA, the more likely a Roth IRA will be advantageous.
Length of Time Before Distribution
The younger you are and the longer the time period before distribution, the greater the Roth IRA’s advantage over a regular IRA.
Your Intended Use of the Funds
To the extent you desire to pass along part or all of your retirement plan assets to your children, a Roth IRA is more attractive. Not only would the assets pass without your children being assessed income tax, but there is no required minimum distributions during your lifetime, as there is with a regular IRA.