Planning and saving for retirement is key in all of our lives. The planning part raises a lot of questions and there are a lot of misconceptions floating around today. We’ll try and clear up a few for you.
Common Misconception: Contributing to a ROTH IRA is always better than a traditional IRA!
Although there are a lot of variables involved the above statement is not necessarily true. By design a traditional IRA contribution is a deduction against taxable income, but taxed when you withdrawal it in retirement. However, with a ROTH IRA you contribute after taxes but withdrawals are tax exempt.
Here is a real world type model that shows similar contributions to both a traditional IRA and ROTH IRA have different outcomes.
Here is the details behind the above calculations:
As you can see based on the above model, the traditional IRA even with taxes being paid has a better performance than the ROTH IRA. Don’t always take common claims as fitting your situation. Keep in mind that this model is very simple and does not take into consideration such things as Required Minimum Distributions from an IRA at age 70 1/2. You will also not that I included an “effective tax rate” instead of the tax bracket rate to be more precise.
Spending a little extra time planning can improve your retirement.