Whether you are at the beginning of your career, approaching retirement, or somewhere in between, it’s important to understand the various options available to help you achieve your retirement goals.
Even if you are already investing in a 401(k) or another retirement plan, contributing to an Individual Retirement Account (IRA) can help you diversify your investments and provide an additional savings plan with tax advantages, experts say.
“There are some important differences between Roth and Traditional IRAs that all retirement planners should keep in mind,” says Mary Ellen Hancock, senior wealth strategist at PNC Wealth Management.
Hancock says to consider the following three things when choosing a retirement account.
Tax Rates
Will your taxes be higher now or later? At first glance, the decision seems straightforward, explains Hancock. If you expect your tax rate to be lower when you retire, a traditional account may provide more income available for retirement. If you expect your tax rate to be higher than it is now or the same in retirement, a Roth account may provide more income available later. The challenge is that there’s no way to know what future tax rates will be, and even if you had a crystal ball, other factors at play should also be considered.
Income and Expenses
“Understanding your spending before retiring can help you have a smoother and more successful transition into the next chapter,” says Hancock. “It’s important to assess which incomes and expenses may be eliminated in retirement and which new expenses may be added.”
Hancock explains that working with a financial advisor can help you estimate your post-retirement budget. However, it’s important to keep in mind that withdrawing from a traditional account to pay for unexpected expenses during retirement can result in unpleasant consequences, such as higher Medicare premiums, more Social Security benefits being taxed, or pushing you into a higher tax bracket. On the other hand, qualified withdrawals from Roth accounts are tax-free and 
should not affect your taxable income or the treatment of Medicare and Social Security benefits.
Required Minimum Distributions
“Roth options may have some advantages over traditional accounts, as you do not have to start withdrawing at age 70 and a half,” says Hancock. “Traditional accounts, both 401(k)s and IRAs, require you to withdraw money once you reach that age, which limits the growth potential of the account.”
For many people, using both Roth and traditional accounts can help manage some uncertainty about their future tax bracket and whether their spending needs may change. There are annual contribution limits for IRAs set by the Internal Revenue Service, so it’s important to check on the IRS website, with your financial planner, or tax advisor how much you can contribute to each.
While no one can plan for every eventuality, understanding your current circumstances and looking to the future can help you make solid investment choices now that can help you achieve your retirement goals.
Source: StatePoint