How to Pick a Retirement Account

Taxes, income and expenses help determine what type of Individual Retirement Account is appropriate for your needs.

Whether you’re starting your career, approaching retirement or somewhere in between, it’s important to understand the various options available to help you reach your retirement goals.  Even if you are already investing in a 401(k) or other retirement plan, contributing to an Individual Retirement Account (IRA) can help you diversify your investments and provide an additional tax-advantaged savings plan.

So, what’s the difference between a Roth and Traditional IRA, and which is appropriate for you?

graphic of trees representing retirement accounts


Traditional IRA

Roth IRA

Tax Advantages
  • Earnings accumulate tax deferred until withdrawn
  • You may be eligible to deduct your contribution on your income tax return (certain limitations apply if you are covered by an employer sponsored retirement plan)
  • Contributions are made after-tax
  • Earnings on contributions and conversions accumulate tax-free
  • Contributions and conversions may be withdrawn at any time, tax free. If you withdraw your conversion before the 5-Year window and you are under age 59 1/2, a 10% tax penalty will be applied
  • Withdrawals after age 59 1/2 are penalty free
  • Required Minimum Distributions begin the year you are age 70 1/2
  • Withdrawals and required minimum distributions are taxed at the individual's ordinary income tax rate
  • No Required Minimum Distributions during your lifetime
  • Contributions and conversions may be withdrawn at any time, tax free. If you withdraw your conversion before the 5-Year window and you are under age 59 1/2, a 10% tax penalty will be applied
Who Can Contribute
  • Individuals under age 70 1/2 with earned income
  • If you are married and your spouse is not working, you may contribute to an IRA for yourself and for your spouse
  • Anyone, at any age, with earned income or whose spouse has earned income
  • Contributions may be limited based on compensation and income tax filing status
  • If you are married and your spouse is not working, you may contribute to an Roth IRA for yourself and for your spouse


3 Things to Consider when Choosing an IRA

1. Tax Rates

Will your taxes be higher now or later?

“This is often the top consideration for people when choosing whether to contribute to a Roth or traditional retirement account,” says Mary Ellen Hancock, a senior wealth strategist with PNC Wealth Management Certified Financial Planner and Master of Science in Taxation.

On the face of it, the decision appears straightforward, she explains. If you expect your tax rate will be lower when you retire, a traditional account may offer you more spendable income for retirement. If you expect your tax rate will be higher than it is now or the same upon retirement, a Roth account may provide you with more spendable income later. The challenge is there is no way to know what future tax rates will be, and even if you had a crystal ball, other (following) factors should be considered.

2.  Retirement Income and Expenses

“Understanding your spending before you retire can help you have a smoother and more successful transition as you begin your next chapter,” says Hancock. “It’s important to assess what income and expenses may be eliminated when you retire and what new expenses may be added.”

Hancock explains that withdrawing from a traditional account to pay for unexpected expenses during retirement can result in unpleasant consequences, such as higher Medicare premiums, more of your Social Security benefits being taxed or raising your tax bracket. On the other hand, qualified withdrawals from Roth accounts are tax free and should not affect your taxable income or treatment of Medicare and Social Security benefits.

3.  Required Minimum Distributions

“Roth options may have some advantages over traditional accounts, as you do not need to start withdrawing at age 70 ½ ,” she says. “Traditional accounts, both 401(k)s and IRAs, require you to withdraw money once you reach age 70½, which limits the account’s growth potential.”

For many individuals, using both Roth and traditional accounts may help address some of the uncertainty over your future tax bracket and whether your spending needs may change. There are IRA contribution limits set each year by the Internal Revenue Service, so it’s important to check with the IRS website, your financial planner or tax advisor on how much you can contribute to each.


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Mary Ellen Hancock
Mary Ellen Hancock explains that there are three important factors to consider when deciding between traditional and Roth IRAs.

Determining your Retirement Income & Expenses

Consider working with a financial advisor to estimate your post-retirement budget. Some considerations include:

  • Will you have a mortgage?
  • Do you plan to live in a state with high property taxes?
  • Do you have other debt?
  • Do you plan to buy a second home or travel?
  • If you live far from children and grandchildren, how much do you expect it to cost you to visit them?
  • Is there a chance you might be looking after your grandchildren while your children are working? You may be picking up the so-called “pocket change” items.
  • If we were to fast-forward to when you are in your 80s and 90s, what type of long-term care coverage do you have in place? Are you planning to self-insure? Depend on social services?

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