5 Reasons to Choose a Roth IRA over a Traditional IRA

Everyone knows tax-advantaged accounts can offer benefits you don’t get from taxable accounts. In the military, the Thrift Savings Plan is a great first step toward retirement savings.  W hin the Thrift Savings Plan, you can even choose specific asset allocations designed for when you need to start using the money by using their Lifecycle Funds.  However, you might be curious about IRAs and whether you should choose a traditional IRA or a Roth IRA.  Below are 5 reasons to choose a Roth IRA over a traditional IRA.

Reason #1:  You Don’t Need a Deduction Now.

You may choose a Roth IRA if you don’t need the tax savings now and expect to be in a higher tax bracket when you start withdrawing from your IRA.

When you compare a traditional and a Roth IRA, the biggest difference is when you realize tax savings.  Since a traditional IRA lets you take an immediate tax break on your contribution, it makes sense for people in high-income brackets (over 25%).

Reason #2: You Plan to be in a Similar or Lower Tax Bracket

Most service members and families are in lower tax brackets, especially those with members who routinely deploy to combat zones.  When these members retire, they might see a slight increase in their tax liability because they lose their allowances.  However, that increase usually will keep them in the same tax bracket.

If you expect your post-military career to ramp up your net worth, you should pay the taxes now.  T t way, you can enjoy tax-free growth in retirement.  This decision requires a lot of thought about how you envision the rest of your life.

Reason #3:  You plan to have more assets than you can use in your lifetime.

If you’re tracking with reasons #1 & #2, then you might end up in a position where you achieve financial independence fairly early.  In that case, it’s worth considering what you’ll do with the money you’ve accumulated. He e’s another key difference between traditional & Roth IRAs.

With a traditional IRA, you’ll have to start taking required minimum distributions (RMDs) after you’ve reached 73.  If you already have enough income to support your lifestyle, your focus shifts to minimizing your tax liability.  While you can do several things to minimize your tax liability with RMDs, it’s much easier to avoid them.

When you choose a Roth IRA, you don’t have to take RMDs.  Ever.  T money is there when you need it.  However, you can let it grow tax-free for the rest of your life without being forced to withdraw it.

Reason #4: You’re covered by a workplace retirement plan, and your income is above the deduction limit for a traditional IRA.

This probably will not happen while you’re on active duty, but it could happen during your post-military career.  There are no income limits for traditional IRA contributions.  However, the IRS limits the deductibility of those contributions if either you or your spouse is covered by a workplace retirement plan.

This means that if a workplace retirement plan covers you and your income is above a certain threshold, your deduction may be partially deductible or not deductible at all.

If you leave the military, you should be aware of:

• The availability of a qualified workplace retirement plan
• Your expected adjusted gross income (AGI)

Knowing these two things will help you decide whether it’s appropriate to choose a Roth IRA over a traditional account.

Reason #5:  You plan to generate cash flow from your IRA to support your living expenses

A lot of people use the following savings plan:

1. Save as much money as possible during working years
2. Figure out what to do with that money after retirement

In general, people are really good at Part 1.  However, they don’t think about Part 2 until retirement.  As a result, a retired couple has usually built a nice-sized nest egg.  When they do, they turn this money over to a money manager.  Most likely, the money manager will use it to generate an income stream, based on the retired couple’s needs.

However, with a little forethought, this couple could have constructed the same portfolio in a Roth IRA.  The Roth IRA would then generate this income tax-free.  I plan to use my IRA to generate income; you should consider your tax liability in retirement.

Meet the Author

Forrest Baumhover

Forrest Baumhover is a Certified Financial Planner™ and enrolled agent. As a retired naval officer, Forrest helps veterans, transitioning service members and their families address the financial...

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