Ravzie,

Let's be careful not to jump to conclusions. Whether a Roth IRA is more favorable than a traditional IRA depends on your individual circumstances.

For instance, if you are currently in the 25% tax bracket but expect to be in the 15% tax bracket when you retire, why pay taxes at a higher rate now in an effort to avoid taxes later when you would be in a lower tax bracket? For this individual, a traditional IRA may make more sense.

A major determining factor determining which retirement account is right for you is whether you intend to be in a higher tax bracket now or during retirement. If you think you will be in a lower tax bracket now, open a Roth account, pay taxes at you low tax rate, and enjoy tax free growth going forward. However, if you think you may be in a lower tax bracket later, you may be better off sticking with your traditional IRA and delaying taxes until that later date.

Of course, this decision is partially guesswork. We really don't know what our tax rate will be in the future. The issue is further complicated by the possibility that tax rates as a whole may be raised to pay for the economic stimulus package, Social Security, and Medicare. Again, we can anticipate these types of changes, but we can't be certain.

As Mr. deWit already pointed out, a major advantage of Roth accounts is that they do not require minimum distributions. Thus, if you are in the luxurious position of allowing your Roth account to continue growing during your retirement without needing to withdraw money to support yourself, a Roth is a great option.

Here is a strategy I frequently recommend: When possible, why not have both accounts? We often talk about diversification in financial planning. Diversify amongst stocks, bonds, and cash. Diversify amongst large, mid, and small cap stocks. Diversify amongst domestic and international securities. Well you can be tax-diversified as well. Since we don't know if you will be in a higher or lower tax bracket during retirement, why not hedge your bets. Have part of your retirement in a Roth in the event you are in a higher tax bracket during retirement, and part of your nest egg in a traditional account in the event you are in a higher tax bracket now.

Excellent details here that should help you answer this question for yourself. I use both a deferred compensation (technically a 457, but it acts like a traditional IRA or 401K) and both my wife and I have Roth accounts. For us, the Roth accounts double as emergency savings, since we can withdraw the contributions at any time without penalty. A bit unorthodox for an emergency fund, but it works for us since we're not likely to have to tap them - and having them in less liquid accounts makes us sure that it's REALLY an emergency before using them for that kind of thing.

The two minute version.

If you qualify (have earned income below a certain salary level):

- no income taxes on earings
- no required minimum distribution
- can withdraw contributions at any time without penalty

Ravzie,

I don't know if it's necessairly better, it just depends on your current (and future) financial situation.

This may help you:

http://www.rothirarules.net/roth-ira-vs-traditional-ira.htm

and

http://www.rothirarules.net and

Cheers!

The reason a Roth is generally regarded as "better" than a Traditional IRA is primarily because even though the money you put into the Roth is after taxes, you don't pay taxes on that money or the growth of that money when you withdraw the money after you've retired. The fact that you don't pay taxes on the growth makes many people consider the Roth better than the Traditional.

With a Traditional IRA, the full amounts you withdraw (contributions + growth) will be taxed.

Hope this helps.