Which one should you choose?
The contribution limits are the same for both plans: $5,500 per person, per year ($6,500 if you are age 50 or above). These are the 2014 and 2015 contribution limits.
You cannot contribute more than $5,500 combined in one year. So, you could contribute $3,000 to a Traditional IRA and $2,000 to a Roth IRA in one year. But not $4,000 to a Traditional IRA and $2,000 to a Roth IRA in the same year.
If you need a tax deduction this year, then a Traditional IRA is for you. Contributions to a Traditional IRA are tax deductible, while contributions to a Roth IRA are not. Also, if your tax bracket will be lower when you retire than it is today, the Traditional IRA has the advantage over the Roth IRA.
Other considerations: A Roth IRA is more flexible, since you don’t have to start withdrawing money once you reach age 70 1/2, which allows you to pass on your money to children or grandchildren tax free. In general, the longer you have until retirement, the greater advantage the Roth IRA has over the Traditional IRA.
To help you compare the two retirement plans with your current tax bracket and potential tax bracket at retirement, here’s a nice calculator that let’s you see which plan is better for you.
For help with making this decision, consult a financial advisor.
Here’s a good article on this topic.
Tom Copeland – www.tomcopelandblog.com
Image credit: rothiraguide.org
For further information, see my book Family Child Care Money Management and Retirement Guide.