Roth IRA vs. Traditional IRA: 3 Key Reasons to Switch

A traditional independent retirement account (IRA), allows you to place pre-tax dollars into an account to save for retirement. These funds grow tax-free until you begin to take the funds out. When you reach the minimum withdrawal age, you are then taxed on the funds you remove on an annual basis. This was the model for retirement for some time, but the Roth option has reversed the playing field. With a Roth IRA, the taxes operate in the reverse manner.

#1 Your Current Tax Bracket is Low

When you have a Roth IRA, you receive no immediate tax break. The contributions you make to the account are not tax deductible, meaning you are saving post-tax dollars. The funds still grow tax-free while they are in the account. Upon reaching age 59 1/2, you can begin taking withdrawals, and these will not be taxed. Basically, you shouldered the burden on the front end of the account, so you have no taxes on the back end. If your current tax bracket is low, it may be preferable to pay the taxes now. Your tax bracket in the future will likely be much higher. This is a great option for young professionals. Professionals already in their high earning years, though, will not realize a large advantage with this option. They may prefer to have the tax break on their current taxable income, which could represent a very large sum. 

#2 You Contribute Less than the Annual Limit

One challenge with the Roth IRA option is the fact that it has a low maximum contribution amount limit. The option is truly designed for individuals with a low income, and these individuals are not likely to contribute more than $5,000 to $7,000 each year. If you contribute more than this, you may be better off with a traditional IRA, because this could be an indication you are in a high-tax bracket. You will be unable to continue to save funds in your account beyond the maximum, which is proportionately lower for married couples filing jointly than for a single person. 

#3 You Think Long Term

The fact remains: the Roth IRA option offers absolutely no benefit in the present over a traditional savings account. Your contributions are not deducted, and your tax burden is not lowered in the given year. A person thinking only in the short term will much prefer the traditional option. That individual can significantly lower a current tax burden. If you think long term, though, you will be able to see the benefits of the Roth account hit your finances when you most need the additional support. If you are relatively young and healthy, you can always go make more money. Once you retire, though, you will be on a permanent limited income with few options to earn more money. You may also have more expenses associated with a mortgage, family or other obligations. It can be hard to think that far down the line when you are young in your career, but ask a retired individual, and that person will tell you how important it truly is.