The Ultimate IRA Cheat Sheet – Infographic

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

Roth Conversion

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

Created by ConnectIRA
Retirement Account Rules

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