Ideally, retirement planning begins early in your career and then continues for decades. You will make a number of decisions when you first open a retirement account, and then reevaluate those decisions throughout your career as you prepare for retirement.
But sometimes things change, and you find yourself wondering if another retirement planning option would better suit you. That can be especially true with regard to tax structure as you head into the final stretch of your working years. You might confront the questions of whether another type of retirement account would work better for your situation.
So, what’s the difference between Traditional and Roth retirement accounts? And why do some people choose to open a second account or conduct a rollover?
With a Traditional retirement account, you make contributions on a pre-tax basis. The contributions grow with taxes deferred, and then later your withdrawals (after age 59 ½) are taxed as regular income. After age 72, distributions are mandatory.
With a Roth account, you contribute after-tax dollars. The funds grow tax-free, and you can make withdrawals after age 59 ½ without owing income taxes on them. Essentially, you can draw a tax-free income in retirement, and there are no mandatory distributions.
Which type of account is right for you? That will depend upon your exact income and tax situation now, along with your predicted situation after retirement. Often, those who expect to be in the same or a lower tax bracket after retirement will choose a Traditional account, whereas those who expect to be in a higher tax bracket might choose a Roth account.
But there are no retirement planning rules that perfectly fit everyone. And in some cases, performing a rollover of funds from a Traditional account to a Roth account can actually allow you to switch up your retirement planning strategy. For more information on that, give us a call and we will explain the process.