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Should I Use A Traditional Or Roth Retirement Account?

Should I Use A Traditional Or Roth Retirement Account?

| November 12, 2019
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Should I Use A Traditional or Roth Retirement Account?

Employer sponsored retirement plans increasingly offer participants a Roth account option in additional to the traditional tax-deferred option.  With traditional tax-deferred accounts, the participant contributes on a pre-tax basis and their savings accumulate tax-deferred.  All funds withdrawn from traditional accounts are taxed as ordinary income.  Thus the term 'tax deferred'.  Participants who use a Roth will contribute to the account on an after-tax basis, and while the account also grows tax-deferred the eventual qualified distributions will not be taxed.  In short, the Roth is more of a 'pay taxes now' while the traditional account is a 'pay taxes later' thing. 

Will Taxes Be Higher?  There are a variety of factors to consider when deciding whether to use a Roth and/or Traditional account.  In my experience as a planner the choice often depends upon your conviction about future tax rates.  If you think your income taxes will be the same or significantly less when you retire then deferring taxes till later with a traditional account may be best.  If you believe your income taxes will be the same or significantly higher during retired then paying taxes now and using the Roth may be better.  

A Warning About 'Professional' Advice.  When deciding whether to use a traditional or Roth account, plan participants often seek advice from their retirement plan provider or an accountant. Unfortunately, neither resource in my opinion should probably be depended upon to properly consider the question.  This is because neither are in the business of facilitating comprehensive long-term personal financial analysis, and, at best, offer 'rule of thumb' guidance that rarely applies to your personal situation.  

What's Your Planner Say?  If you work with a financial advisor or professional financial planner then you should have the proper resources to compare the Roth and Traditional retirement accounts within the context of your personal financial plan. Very often a comparison will identify the tax tipping-point where it becomes advantageous to use a Roth.  An analysis of the tax impact on your heirs may also shed light on the question.  If you don't own long term care insurance then you may also want to assess how each type of account fares in the event you have to take substantial unexpected distributions for things like health care.  Bottom line... there's a lot to consider and the decision to use a Traditional or Roth retirement account will depend upon a number of personal variables that rules of thumb won't consider.  My best advice is to thoroughly consider both options within the context of your personal financial plan.  

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