Roth or traditional? How to choose the right retirement account for you

Saving for retirement can come with a lot of choices. One of them? Whether to contribute to a traditional (pre-tax) or Roth (post-tax) account.

Many workplace retirement plans and individual accounts offer both options, and the key difference comes down to when you pay taxes on your money—now or later. Understanding the options can help you decide how much to save through the years, and how those savings may (or may not) be taxed in the future. Your choice depends on your income, future expected income, and tax planning. Here are some insights.

When you contribute to a traditional retirement account, you’re typically doing so with pre-tax dollars. That means you haven’t paid income taxes on those funds yet, and the deductions help to reduce your taxable income today. You also typically don’t pay taxes on investment growth; that’s why they’re called tax deferred, too.

However, once you make withdrawals in retirement, you’ll pay ordinary income tax on both contributions and any growth. One main advantage for many is that, if you’re in a lower tax bracket in retirement, you’ll pay the income tax on those withdrawals at that level.

Roth contributions, on the other hand, are made with after-tax dollars; you’ve already paid income tax on those dollars before you choose to add them to your savings. That means when you make qualified withdrawals (both contributions and earnings) in retirement, you’ll do so tax free when certain conditions are met. Because withdrawals don’t increase taxable income, they may offer an advantage to people who think their tax bracket will be higher in retirement.

One way to think about all of your retirement savings? Saving in different accounts offers advantages, both in your working and retirement years. Roth accounts lets you save post-tax dollars, while traditional versions reduce your taxable income. If you want to strategize, you can think of it this way:

• Start by saving enough in your employer plan, if you have one, to get the match.
• Then create and add to an IRA—either Roth or traditional—as you are able and so you have an account that travels with you.

You can create a strategy for how you save for retirement and think about the taxes. If you’re not sure where to start, a financial professional can help.