I look forward to the day when I can say I am retired. I envision myself golfing two or three days per week and working out at the gym almost everyday. I will have the time to read all the books I ever desired and more importantly, watch great movies. I love movies! I might be even able to start doing some volunteer work in my local community. However, if I want to truly retire, I have to plan accordingly. Living on Social Security or an employer sponsored retirement plan will probably not be enough to sustain my retirement, so I have to take the necessary steps to safeguard my retirement. Today, I will focus on traditional vs Roth IRA’s.
A traditional IRA is an individual retirement account that allows you to save for retirement and take tax advantages. For example, if you have a traditional IRA you do not have to pay the taxes on earnings and gains until you start withdrawing from it during retirement. A person can start withdrawing money when they reach 59½. An individual is also required to start taking distributions in the year they turn 70½. The most you can contribute to a traditional IRA if you are until 50 years old is $5,500 per year. This option is great if you want to reduce your taxable income each year.
A Roth IRA is an individual retirement account that allows you to pay the earnings and gains each year. Basically, you are paying the taxes now, so you do not have to pay when you start withdrawing. A person can start withdrawing money when they turn 59½ and there is no age limit to required distributions. The max contribution is $5,500 per year if you are under 50 years old. This option gives more flexibility and will reduce your tax burden during retirement.
So, which one should I choose? If you feel that taxes will be lower in the future, the Traditional IRA is probably better for you. If you believe, however, that taxes will be higher in the future, the Roth IRA is a better choice. Also, If you own a Roth, you can leave the money in for as long as you want. There is no required minimum distributions.
I personally like the Roth IRA because historically, taxes generally go up and I would rather pay the taxes now. I also like knowing that I do not have to start withdrawing money from it by age 70½. I am sure I will start taking money out of it before that age, but I do not like the government telling me I have to.
Now, there are several options a person can take to get a Traditional or Roth IRA. Your local bank will almost certainly offer these IRA’s. The biggest concern is paying various fees and keeping up with inflation. These fees can add up quickly and seriously cut into profits. A person really needs to do their research before making a choice.
I strongly believe Vanguard is the best place to get your Traditional or Roth IRA. The Vanguard Target Retirement Funds give you a complete retirement portfolio in a single fund. All you need to do is look at the timeline that you feel you will retire and select that plan. For example, I chose the Vanguard Target Retirement 2040 Fund and that fund is primarily designed for individuals who are planning on retiring in the year 2040. I will turn 60 years old during that period, so I will be past 59½. If you are younger or older, Vanguard has several targeted funds that fit your circumstances.
In the end, I just hope that you do not rely solely on Social Security or an employer sponsored retirement plan. I think individuals need to diversify and have multiple streams of income. If you or a spouse is self-employed having an IRA is crucial. Do you really want to take a chance of not being prepared and have to work until the day you die. I want to enjoy those golden years a little. As always, if you have questions or want to discuss how you are planning for your retirement, please share. If you want to learn more, a good article to read is Dayana Yochim’s Roth vs. Traditional IRA: Which Is Best for You?