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Roth vs. Traditional Retirement Savings
Many of you are familiar with Roth IRAs: instead of providing a tax deduction at the time of your contribution, the distributions are tax-free. For most of our clients the expected value of the Roth at retirement will be greater than the traditional IRA, after income taxes are factored in.
And while traditional IRAs require annual distributions starting by age 70, distributions are never required from Roth IRAs during the owner's lifetime. Once the owner and his or her spouse die, the Roth can be transferred to beneficiaries without concomitant income tax, unlike the traditional IRA.
Roth distributions do not increase the income when determining whether your Social Security payments are taxable, unlike regular IRA distributions and tax-exempt income.
The main drawback to Roth IRAs is the limitation of who can contribute and how much. Taxpayers with gross income above $160,000 (joint filers) and $110,000 (single filers) cannot contribute. The maximum contribution allowed for anyone is $4,000 (plus $500 if age 49 or over).
New in 2006, employers are allowed to offer a Roth 401(k) feature. The provisions are similar to the Roth IRA, with a few important distinctions. First, there are no income limitations; i.e., if your employer offers a Roth 401(k), you can contribute to it. Second, you can contribute up to $15,000 (plus $5,000 if age 49 or older).
There is one very important feature to be aware of. While Roth IRAs do not require distributions, Roth 401(k)s do. So anyone with Roth 401(k) contributions will want to roll their account into a Roth IRA when they stop working.
For a comparison of Roth vs. traditional savings, the CCH site has one of the best calculators.
