10 Feb Choosing the right IRA before April 15

Q. How can I decide if I should choose a Roth IRA or a regular IRA? I want to make the contribution before the tax deadline.
— Trying to choose

A. Using an IRA — whichever kind — is a great way to build wealth over time.

If you’re talking about contributions for the 2015 tax year, you have until April 15 to make the contribution, which is $5,500 with an extra $1,000 for those over age 50. The limits are the same for 2016.

One of the first considerations is your income level.

For single filers in 2016, you can only contribute to a Roth IRA if your income is below a threshold that starts at $117,00 and tops out at $132,000, said Andrew Wang, senior vice president of Runnymede Capital Management in Mendham.

Within the range, he said, your contribution is limited, eventually reaching zero.

For married couples filing a joint tax return, eligibility limits start at $117,000 and end at $194,000. If your income is above those limits, then you’ve got to go for a traditional IRA, Wang said.

It makes sense to speak with your tax preparer to see what contributions you’re eligible for, and if you can’t do a Roth, you can still do the traditional IRA.

“There are no income limits to traditional IRA contributions, however unlike the Roth IRA,” said William Connington of Connington Wealth Management in Paramus.

You should also look at deductibility of your contribution.

The deductibility depends in part of whether you have an employer-sponsored retirement plan, Connington said.

“If neither you nor your spouse is an active participant, you may deduct your full contribution for the year, up to the contribution limit,” Connington said. “If, however, you are an active participant, your tax filing status and modified adjusted gross income (MAGI) determine your eligibility to deduct your IRA contribution.”

A Roth contribution is never deductible, he said.

The tax treatment of distributions is another factor that determines whether the Roth or traditional IRA is better for you, Connington said.

He said generally, distributions from a traditional IRA are treated as ordinary income and may be subject to income taxes, and if you take an early distribution before age 59 ½ you may be subjected to early distribution penalties.

On the other hand, Connington said, qualified Roth IRA distributions are tax- and penalty-free.

“You can withdraw your contributions — not earnings — without incurring a penalty so you do have more access to your money,” he said. “There are requirements that you have to meet but basically if the distributions are taken no earlier than five years after you funded your first Roth IRA and the distributions are taken because you have reached the age of 59 ½, are disabled, you are using the funds to purchase a first home or a beneficiary receives distribution at your death.”

Wang noted another big difference between the two kinds of accounts.

A traditional IRA requires you to take Required Minimum Distributions (RMDs) at age 70 ½, at which time you can no longer contribute to the IRA, Wang said.

“A Roth IRA never requires you to withdraw earnings and you can contribute to your Roth as long as you have earnings,” Wang said. “This can be of great help if you continue to work past your traditional retirement years.”

If you’re eligible for both a Roth and a traditional IRA, the choice depends in part on whether it’s better for you to pay the now or later, Wang said.

If you choose a Roth, you’ll use after-tax funds to make your contribution, and that’s essentially paying the tax upfront. With a traditional IRA, you’ll pay tax when you take your distributions.

“You’re generally better off in a traditional IRA if you expect to be in a lower tax bracket in retirement,” Wang said. “That said, anticipating your future tax rate can be challenging especially if you’re many years from retirement, so many experts say that a Roth IRA may be the better choice for most individuals because it offers potentially greater tax benefit and more flexibility when it comes to funding and withdrawals.”

Connington said to make your decision, ask yourself at what age you plan to retire, what other assets you have, how you can maximize Social Security and think about your plan to use these assets in retirement to provide your cash flow needs.

“Those decisions will go a long way to helping you determine which IRA is best for you,” he said.

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This story was first posted in February 2016.