Learn the Main Differences Between a Roth IRA and a Traditional IRA

To break even in terms of after-tax savings, you must be disciplined enough to reinvest your traditional IRA tax savings each year into your retirement savings. If that seems doubtful, you’d be better off saving in a Roth, where you’ll have more significant after-tax savings when you retire.

 
  1. Investing in a Roth in addition to your 401(k) provides tax diversity. Most companies’ regular 401(k) plans give the same tax advantages as a traditional IRA. Although some employers offer a Roth 401(k) option for employees, if yours does not, putting some of your retirement assets into a Roth IRA will give you more alternatives for managing your tax burden in retirement.

Making the Call

The only advantage of a regular IRA is the tax break for most people. And we’re not ignoring this benefit: it may be a substantial benefit for high-income earners and a terrific incentive for folks who might otherwise avoid saving for retirement. In the short term, it effectively makes saving for retirement “cheaper” because the tax savings each year reduce the cost of your contributions.

However, you will have to pay that tax burden in retirement, so unless you absolutely need that upfront tax reduction, it’s difficult to go wrong with a Roth IRA.