Key findings However, they also have drawbacks. Because of this five-year rule, it may be less beneficial to open Roths if you’re already in late middle age. There’s another reason to insure yourself against a Roth, and it relates to current access to income versus potential tax savings in the future. A Roth can save you more income in the short term, as you are forced to deposit money after tax.
In contrast, with a traditional IRA or 401 (k), the income required to deposit the same maximum amount into the account would be lower because the account draws on pre-tax income. In this video from the Motley Fool Live Financial Planning series, longtime Fool retirement and financial planning expert Robert Brokamp discusses the downsides of a Roth IRA. As he explains, the most important factor is whether you benefit more from a tax break now than from tax-free treatment later on. Roth IRAs offer the advantage of allowing tax-free withdrawals, including on income, in retirement, instead of receiving immediate tax benefits for contributions as with traditional IRAs.
So a traditional IRA may be a better choice if you need the tax deduction and still want to contribute to an IRA. If you don’t name a beneficiary, your spouse (if they’re your primary beneficiary) can decide to inherit your Roth IRA or transfer it to a Roth IRA on their behalf. If you want to transfer or “transfer” money from a traditional IRA to a Roth IRA, the entire amount is taxable.
