Financial Planning, Investing

Choosing a Roth vs. Traditional IRA: It’s About More Than Just Taxes

August 02, 2023

By Andi McNamara, CFP®
Vice President, Director of Financial Planning
Washington Trust Wealth Management

Is a Roth or Traditional IRA best for you? It’s all about asking the right questions.

A typical search for “Which is better: Roth or Traditional?” will yield thousands of results and multiple calculators, primarily based on comparison of your current versus retirement tax bracket. It is an oversimplified approach: If you’re in a higher bracket now, take the tax deduction and choose Traditional; if you are expecting a higher tax bracket in retirement, pay the taxes now and choose Roth.

Spoiler alert: Not every financial question is a math equation, and your feelings and confidence about your money decisions can be as important as the numbers. A decision that may save a few tax dollars but leaves you anxious and unable to sleep is not the best one for you.

Traditional IRA

Roth IRA

Funded with

Pre-tax $

After-tax $

Contribution Limits (for 2023)

$6,500 ($7,500 if age 50+)

$6,500 ($7,500 if age 50+)

Taxes

Contributions are tax-deductible

Withdrawals are taxable

Contributions from after-tax dollars; no deduction

Tax-free withdrawals (after 5 years)

Income Limits for Contribution Eligibility

None

< $153,000 (single tax filers)
< $228,000 (married, filing jointly)

Required Minimum Distributions (RMDs)

Required in your 70s; start date varies based on birthdate

None

Penalty for Early Withdrawal

10% on all withdrawals unless exception applies

Return of contributions penalty free; everything else 10% unless exception applies

Comparison Tablei

So, what questions can you ask to ensure you’re making decisions that support both your short- and long-term goals? Here are a few to consider:

Who will get the money after I die?

If you have more money available than you will likely spend, consider who will get the remainder. If it’s a charity, that beneficiary is tax agnostic (they won’t pay taxes on the money), so Traditional or Roth does not matter. But your children, grandchildren, or other beneficiaries will pay income taxes on the money. A Roth IRA is far more desirable for your heirs since there are no income taxes when they inherit the money.

Are my accounts tax diversified?

Tax diversification in your investments—how much you have in traditional retirement accounts (portfolio income tax deferred until withdrawal) compared to taxable accounts (pay dividend and interest income tax as you go) and Roth (portfolio income not taxable and not taxable at withdrawal)—allows you flexibility for financial planning in retirement. For example, some years you may want to avoid generating additional IRA income that is fully taxable to offset other financial transactions, such as selling a real estate property or a stock that generates a large capital gain. This flexibility is also beneficial for years with large outlays of cash, like paying for college or a wedding, taking the family on a big trip, or buying a second home.

Should I have both Traditional and Roth?

Yes! We recommend you get at least some money into a Roth retirement plan as often as possible. If you are able to contribute to a Roth IRA directly or do a strategy referred to as a Backdoor Roth IRA conversion (contribute to your IRA without a tax deduction and convert it to a Roth), you should. The best of both worlds is a strategy referred as a Mega Backdoor Roth Contribution within your employer-sponsored retirement plan like your 401(k), if available because you can contribute on a pre- and post-tax basis. First, max out your traditional, pre-tax contribution and get the full tax deduction. Then, contribute more using your after-tax option and have the custodian do an in-plan conversion to your Roth 401(k) source. Not all custodians have this option, but it is extremely powerful if they do.

Mega Backdoor Roth Contribution Example
You are 55 years old and are allowed a catch-up contribution, which brings your total pre-tax contribution amount to $30,000 in 2023. Your custodian allows for the Mega Backdoor Roth Conversion, so you contribute the maximum after-tax amount,ii which is then immediately converted to Roth within the plan. Depending on your employer contribution amount, you may be able to contribute another $40,000 to your Roth source in your plan. For example: If you contribute $30,000 pre-tax and your employer contribution is $10,000, that leaves another $33,500 available for the Mega Backdoor Roth in-plan conversion.iii

Washington Trust Wealth Management is Here to Help

At Washington Trust, we work closely with you to evaluate and plan which IRA makes good financial sense for you. Using a sophisticated software platform, we can determine when and how to best take advantage of the tax benefits and savings potential and address important factors to consider, including your tax bracket, time horizon, available funds, investment preferences, and Qualified Charitable Distributions (QCDs). Working together, we can select the account that best aligns with your long-term retirement objectives.

Connect with a wealth advisor

No matter where you are in life, we can help. Get started with one of our experts today. Contact us at 800-582-1076 or submit an online form.

Contact us

This document is intended as a broad overview of some of the services provided to certain types of Washington Trust Wealth Management clients. This material is presented solely for informational purposes, and nothing herein constitutes investment, legal, accounting, actuarial or tax advice. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. Please consult with a financial counselor, an attorney or tax professional regarding your specific financial, legal or tax situation. No recommendation or advice is being given in this presentation as to whether any investment or fund is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors, or markets identified and described were, or will be, profitable.

Any views or opinions expressed are those of Washington Trust Wealth Management and are subject to change based on product changes, market, and other conditions. All information is current as of the date of this material and is subject to change without notice. This document, and the information contained herein, is not, and does not constitute, a public or retail offer to buy, sell, or hold a security or a public or retail solicitation of an offer to buy, sell, or hold, any fund, units or shares of any fund, security or other instrument, or to participate in any investment strategy, or an offer to render any wealth management services. Past Performance is No Guarantee of Future Results.

It is important to remember that investing entails risk. Stock markets and investments in individual stocks are volatile and can decline significantly in response to issuer, market, economic, political, regulatory, geopolitical, and other conditions. Investments in foreign markets through issuers or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical, or other conditions. Emerging markets can have less market structure, depth, and regulatory oversight and greater political, social, and economic instability than developed markets. Fixed Income investments, including floating rate bonds, involve risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. Interest rate risk is the risk that interest rates will rise, causing bond prices to fall. The value of a portfolio will fluctuate based on market conditions and the value of the underlying securities. Diversification does not assure or guarantee better performance and cannot eliminate the risk of investment loss. Investors should contact a tax advisor regarding the suitability of tax-exempt investments in their portfolio.