ROTH vs Traditional: How to Choose the Best Option for Your Needs

Are you trying to decide between a ROTH and a traditional retirement account? It can be a tough decision, but don't worry, I'm here to help.

A retirement account is a bucket where you put your savings with the goal of investing and growing that money for the future. When it comes to taxes, you have a choice: you can either pay them now or later.

With a ROTH, you contribute after-tax dollars to fund the account. This means that the money you put in has already been taxed. The account then grows tax-free and eligible withdrawals at retirement are also tax-free. This applies to both a ROTH 401(k) and a ROTH IRA.

One of the biggest advantages of a ROTH IRA is that you can take your original contribution, known as the cost basis, out of the account at any time without paying taxes or penalties. This is a great feature if you need access to your savings for an unexpected expense, like a car emergency or a home repair.

On the other hand, a traditional retirement account is funded with pre-tax dollars. This means that the money you put in hasn't been taxed yet. The account then grows tax-deferred, which means that the taxes on the money in the account are deferred until you retire and start taking withdrawals. This applies to both a traditional IRA and a traditional 401(k).

Let's say you're in the 25% tax bracket and you put $10,000 into a traditional retirement account. This means that you'll save $2,500 in taxes, because you didn't have to pay taxes on that money right away. However, when you retire and start taking withdrawals, you'll have to pay taxes on that $10,000, plus any investment gains, at your current tax rate.

In contrast, if you put $ 10,000 into a ROTH account, you won't save any money on taxes right away. But when you retire and start taking withdrawals, you'll get to keep all of your money and investment gains, tax-free. This can be a great deal if you expect to be in a higher tax bracket when you retire, or if you think taxes will go up in the future.

In summary, the main differences between a ROTH and a traditional retirement account are when the taxes are paid and the rules for withdrawals. Both types of accounts have their own advantages and disadvantages, and which one is right for you depends on your individual circumstances. It may be helpful to speak with a financial advisor to determine the best option for you.

A financial advisor can help you compare the different options, and create a customized plan that fits your unique situation and goals. They can also help you navigate the rules and regulations, and make sure you're taking advantage of all the benefits and opportunities available to you.

If you're deciding between a ROTH or a traditional retirement account, don't hesitate to reach out. I'd be happy to help you make the best decision for your future. nick.greenhouse@redwoodprivatewealth.com

Disclaimer:

The opinions from this article are my own and don't necessarily represent Redwood's positions, strategies or views. This article is for educational purposes only and should not be taken as financial advice. For financial advice specific to your current situation please schedule an appointment with me.