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When is it appropriate to use a Traditional vs. a Roth IRA?

A Roth IRA is more appropriate when you are younger since you have a longer time for tax-free accumulation. Most studies suggest that the cutoff age is around 50. However, a Roth IRA is not appropriate for people who will be in a zero or very low tax bracket when they retire. If you do not foresee the need to draw on your IRA in retirement then you will want to fund a Roth IRA.

Of course, none of us have a crystal ball, so you may want to hedge by splitting your contributions across both a Roth and a Traditional IRA (say 50/50) if you don’t know what your income is likely to be upon retirement.

If you’re a young professional who has a high potential upside to your income, then you’re probably better off with a Roth. If you’re a young college graduate who’s making about $100,000 per year and you only expect your income to grow with inflation then you’re probably better off with a 50/50 split until the future starts to become clearer and then adjust accordingly.

Please consult your tax advisor to determine what is best for you.

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Wealthfront prepared this article for informational purposes and is not intended as tax advice nor as an offer, recommendation, or solicitation to buy or sell any security. Wealthfront does not represent that any strategy will result in any of the outcomes described, including the effectiveness of any strategy in reducing tax liability, as this depends on an investor’s specific tax and investment profile. Investors are encouraged to consult their personal tax advisors regarding their unique circumstances and any outcomes/consequences that may result from any investment strategy. Investors and their personal tax advisors are responsible for how the transactions in an account are reported to the IRS or any other taxing authority.

Wealthfront and its affiliates may rely on information from various sources we believe to be reliable (including clients and other third parties), but cannot guarantee its accuracy or completeness. See our Full Disclosure for more important information. Financial advisory and planning services are only provided to investors who become clients by way of a written agreement. All investing involves risk, including the possible loss of money you invest. Past performance does not guarantee future performance.

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