Traditional IRA vs Roth IRA Worksheet

Use this traditional IRA vs Roth IRA worksheet to determine the best mix of retirement accounts

The conventional wisdom says that you should compare your income tax rate now with the rate you expect in retirement to determine whether a Roth IRA is the right choice for your needs. Roth IRA contributions don’t benefit from the tax deduction you get from other IRA contributions but you get to withdraw the money tax-free in retirement. If your future tax rate will be higher than it is now, it makes sense to pay the lower rate now.

Turns out, it may not be as simple as guessing at your future income tax bracket. We’ve talked about in past articles how taxes are likely going to get worse, especially taxes for high net worth individuals. The surging government debt and precarious fiscal situation makes it extremely difficult to estimate your future tax situation and the only solution may be to diversify your tax burden in with both traditional IRA and Roth IRA investments.

Still some questions so thought I would build out a Trad IRA vs Roth IRA Worksheet

Filling out Your Traditional IRA vs Roth IRA Worksheet

Answer these questions to estimate how much of your retirement investments should be in a traditional IRA vs a Roth IRA.

1. Have you or will you in the future seek an educational level that will boost your income?
2. Are you starting in a highly-paid industry or is one in your career path?

Questions 1 and 2 point to the potential to be in higher tax brackets in the future. You may end up making much more than you expect and paying more taxes in the future. Pay the tax bill now and contribute to a Roth IRA.

3. Are you now in the highest or the lowest income tax bracket?

If you’re in the highest income bracket now, you need all the tax savings you can get and should max out your traditional IRA contribution. If you’re in the lowest bracket, you don’t need the tax deduction now but may in the future.

4. Have you already met much of your retirement goal with assets in your traditional IRA or other retirement plans?

If you’ve already met much of your goal with a traditional IRA then consider paying a little more in taxes to diversify your future income stream with a Roth IRA.

5. Is your income level too high to contribute to a Roth IRA?

If your income is too high to contribute to a Roth IRA, you might want to consider a Roth IRA conversion to protect your retirement assets from taxes.

6. Do you have more retirement assets than you will likely need?

There are no required minimum distributions for Roth IRA assets as with traditional IRAs. Roth IRAs can be passed on as an inheritance with some great tax advantages.

7. Are you more than five years of retirement?

Some rules around Roth contributions and conversions limit the tax advantage if made within five years of retirement.

If your answers were mostly yes and you are already in one of the higher income tax brackets, you may want to consider putting a large portion of your assets into a tax-advantaged Roth IRA. If your answers were mostly no then you will still want some money in a Roth IRA but will likely be better off holding most of your retirement in a traditional IRA.

Don’t wait to look through the Traditional IRA vs Roth IRA questions above to decide how much you need in each account. Retirement plan changes are coming due to the government spending gap and your ability to convert from an IRA to a Roth IRA may be in jeopardy. Understand the benefits and the process of a Roth IRA transfer and put your retirement plan on solid ground.