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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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This article is not intended as tax advice, and Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. 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.

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