Traditional vs. Roth IRA: Decide Which is Best for You

Whether you are self-employed, or whether you work for “the man”, an IRA can be one way to increase your retirement nest egg. When you go to set up an IRA, though, you will need to decide whether you want a traditional IRA, or whether you want to go with a Roth. You will need to consider your options, and think about the pros and cons of each type of IRA. Below, this helpful infographic from CreditLoan.com offers a look at the key differences between the traditional IRA and the Roth IRA, answers common questions about IRAs, and provides a helpful flow chart that can help you determine which course of action is likely to be best for you: [CLICK IMAGE FOR LARGER VIEW]

Traditional IRA vs. Roth IRA: How to Decide which IRA is best for you.

Traditional IRA vs. Roth IRA: Click For Larger Image

What to Consider When Choosing

One of the most important things to consider in your decision — once you’ve established that you are eligible for either type of IRA — is what you think your tax bracket will be. If you think you will be in a higher tax bracket, it can be a good idea to consider a Roth IRA, since your withdrawals won’t be taxed. However, if you expect your tax bracket to be lower, a traditional IRA can be helpful since you get your deduction now, and when you do pay taxes on withdrawals, it will be at a lower rate. Another good idea is to consider the withdrawal penalties. While no one invests in a retirement account planning on taking early withdrawals, you never know when a financial emergency is going to arise.

Advantages of Both IRA’s

In either case, there are advantages. Remember, thought, that IRA contributions are somewhat low as compared to those allowed in 401k plans and Roth 401k plans. You can only contribute up to $5,000 ($6,000 if you are at least 50) in 2010, so if you don’t have a lot of time to let your money grow, it may not grow fast enough. The longer you have for your money to grow, the more it can work for you, and the bigger your nest egg has the potential to be. If you are concerned about the time limit, you can check into 401k plans to see if they might help you.

Beware The Risks

Just remember that these retirement accounts consist of investments, and that it is possible to lose money. You should also be prepared with a diverse portfolio that can help you sustain the blow if a market crash happens just before (or during) your retirement. These types of investments do not come with a guarantee, and you can find yourself in a tough position. A backup plan is a wise thing to consider when planning your retirement. Think about what you might do if your retirement investment accounts tank just ahead of retirement.

Of course, it is important to remember that each person is individual, and this infographic may not provide enough information for each person to make the best decision. You can speak with a financial professional to help you work out a retirement plan, and help you evaluate which type of IRA is best for you.

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