Roth vs Traditional IRAs – Which Is Best For A Family On A Budget?

by Guest on April 16, 2012

Retirement funding may not be the first thing on your mind when you’re worried about soccer practice basic meal planning and making it to the weekend, but saving for retirement now when your family is young – even if you’re on a tight budget – will ensure that you have a more secure future. While many parents are more concerned about saving for college than retirement, this is backwards thinking. Always remember: Your kids can find alternative funding for college, but no one is going to scholarship your retirement.

With that in mind, let’s talk about how you go about funding your retirement with an IRA. The main distinction here is Traditional vs. Roth IRA, and it can be tough to decide which is best for your family when you’re on a budget. Here’s what you need to know about the essentials of how these retirement accounts work and how you can choose which option will work best for your family.

The Basics

The basic difference between the Roth IRA and the Traditional IRA is the way they are taxed. The Roth IRA doesn’t offer any tax deductions for contributions, but withdrawals aren’t taxed down the road, either. The Traditional IRA, on the other hand, offers a tax advantage for contributions now, but withdrawals are taxed in retirement.

One other major difference is income limits. You can contribute to a Traditional IRA regardless of your income, but you can only contribute to a Roth account if you have a maximum adjusted gross income below a certain level. The specific limit changes from year to year, as do the maximum contribution amounts for the Roth, so make sure to speak with a financial advisor about this.

There are also differences in contribution limits for the Roth and Traditional IRAs, but those are less important than the tax differences when it comes to deciding which is right for you. If you can meet and exceed the contribution benefits for one type of account, then you can also contribute to the other type of account or open another retirement savings account.

Which is Better?

There’s no cut and dried way to decide if a Roth or a Traditional IRA would be better for you right now. Remember, if you start a Traditional IRA, you can convert it into a Roth later on, as well. Here is some information on individual situations in which one or the other option might be better:

  • If you’re struggling to contribute to retirement savings at all because it’s such a stretch for your budget, then a Traditional IRA might work better for you now because contributions come with a tax write off. The cut in your tax bill may be just the financial incentive you need to contribute regularly to your IRA.
  • If you’re in a job where you’re likely to make a lot more money when you retire than you do now, then a Roth is definitely the better option. You’ll likely end up in a higher tax bracket in a few years and when you’re in retirement, which means that you’ll pay higher taxes on your withdrawals from a Traditional IRA if you decide to go that route.
  • If you’re in a stable salaried position that you don’t expect to leave, and you don’t expect for your job to pay much more when you’re close to retirement than it does now, a Traditional IRA might be an okay option. The problem is that the tax rate is likely to rise, which can still leave you with the short end of the stick when you make your withdrawals during retirement.

In general, if you can open a Roth IRA, it will usually provide you with better benefits in the future. However, if you’re more concerned with paying the mortgage today than you are with going golfing in twenty-five years, a Traditional IRA can give you some incentive to save now, which will have a big pay-off in the long run, even if you end up paying more in taxes on withdrawals. The truth is that there is no “right answer” for every family, so you need to take time to decide what works best for your family.

According to one CBS News article, the bare minimum you should shoot to save for retirement is about $500,000, although most Americans are completely clueless about what they need to save for retirement. Even though that might seem impossible now when your family is young and your budget is tight, if you make it a point to pay yourself first by saving for retirement now, it will only become easier in the future as your income increases.

What Else You Can Do

Wondering what else you can do to ensure that you start your retirement savings off right and save enough for retirement? Here are a few suggestions:

  • Meet with an advisor: A certified financial advisor can look at your current income and budget and help you determine how and where to invest your money right now. In fact, a financial advisor is the best person to ask if you’re still not sure whether a traditional or a Roth IRA is best for your family right now.
  • Stick to a budget: Make sure you’re living as well within your means as possible. If possible, you should try to save about 10% of your income for retirement. If you aren’t quite there yet, then save as much as you can, and increase your savings further down the road.
  • Make smart credit decisions: One of the worst things you can do while your family is young is run up a lot of debt. Then, you’ll be caught in a constant cycle of making payments and not saving for retirement. It’s not necessarily horrible to have some debt, but you should be smart about it and make sure you’re taking time to make wise debt decisions rather than just flying by the seat of your pants when it comes to this issue. One thing you should do, for instance, is compare credit cards to ensure that you’re getting a low interest rate and the best benefits from your credit card. Then, continue to live within your means, only using credit for the benefits you can get from a credit card or to pay for the occasional big ticket item.
  • Set other goals, too: Setting a goal for retirement is nice, but it’s hard for many young couples to stick to retirement goals because they seem so far away. In your savings goals, set some shorter-term goals, too. Whether you want to pay off debt, take a family vacation, buy your first home with a big down payment, or pay for a child’s college education, shorter-term savings goals can help you feel like you’re accomplishing something financially, which can help you stay on the right track.

Deciding between a Roth IRA and a Traditional IRA for your family’s retirement savings goals can be tough, but this basic information can give you the power to make the choice that’s best for your family. Then, you can take these other steps to secure your family’s financial future.

About The Author

This article comes from Stephanie Phillips at CreditDonkey.  CreditDonkey helps consumers compare credit card applications and deals.

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Vincent Clarke April 18, 2012 at 4:30 pm

“Your kids can find alternative funding for college, but no one is going to scholarship your retirement.” I like that!

I admit I’m having a hard time convincing myself retirement saving should be a priority right now, but even if I only put a little bit in each month for now, it’ll still add up eventually! Thanks for the advice.

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