Roth or Traditional IRA
Deciding which type of IRA to invest in can be a difficult choice. If you think your tax rate will be the same or higher in retirement then a Roth IRA is probably the better choice. For young taxpayers in the 15%-25% tax brackets that expect earnings to rise in the future, a Roth IRA makes sense. For those that are in peak earning years and expect to be earning less in retirement a 401k is the better option. Another way to look at it:
What do you expect the tax rate to be in the future when you are making withdrawals?
- Lower – Consider pre-tax traditional IRA
- Higher – Consider Roth IRA
- Uncertain – Consider diversifying investments between traditional and Roth IRA
A Roth IRA Conversion is a little more complicated. Whether a conversion is the right decision for you involves whether the funds you are thinking of converting were pre-tax or after-tax contributions and whether future tax rates are expected to increase.
In the case of a traditional IRA funded with pre-tax dollars, the entire balance will be taxed as ordinary income. If you have reason to believe future tax rates will be higher you should consider a conversion with the rational being to lock in lower taxes over the life of your portfolio. If you expect tax rates to decline in the future you should consider maintaining a traditional IRA. In the case of a traditional IRA funded with after-tax dollars, the tax liability on the conversion is calculated on the untaxed portfolio gain.
If you are considering a Roth IRA Conversion - Vanguard Roth Conversion Calculator