A Roth IRA or 401 (k) is the most sensible if you're sure you'll have a higher income when you retire than you do now. If you expect your income (and your tax rate) to be higher today and lower when you retire, a traditional IRA or 401 (k) is probably the best option. The main difference between a Roth IRA and a traditional IRA is how and when you get a tax break. Contributions to traditional IRAs are tax-deductible, but retirement withdrawals are taxable.
By comparison, contributions to Roth IRAs are not tax-deductible, but those withdrawn in retirement are tax-exempt. Let's say you're eligible for both a Roth account and a traditional IRA. You usually do better in a traditional version if you expect to be in a lower tax bracket when you retire. By deducting your contributions now, you reduce your current tax bill.
When you retire and start withdrawing money, you'll be in a lower tax bracket, which will give the tax collector less money overall. If you expect to be in the same tax bracket or higher when you retire, you may want to consider contributing to a Roth IRA, which allows you to settle your tax bill now and not later. If you're eligible to contribute to any of the IRAs and receive a deduction for contributions to a traditional IRA, it's worth considering what your tax rate might be when you start withdrawing funds. If neither you nor your spouse (if any) participate in a work plan, your traditional IRA contribution is always tax-deductible, regardless of your income.
Saving the maximum amount ultimately translates to more after-tax retirement assets for your Roth account balance than a traditional pre-tax contribution. If your tax rate will be lower in the future, a traditional IRA can help you make the most of your tax benefits because you can deduct your contribution this tax year and pay taxes on future retirees at a lower rate. To get even after-tax savings, you must be disciplined enough to reinvest the traditional IRA tax savings you earn each year in your retirement savings. While some workplaces offer a Roth 401 (k) option for employees, if yours doesn't, diverting part of those dollars from those retirement savings to a Roth IRA will give you more options for managing your tax burden during retirement.
Of course, on the other hand, tax savings may offer an additional incentive to save now that Roth IRAs don't. If you think you'll be in a higher tax bracket when you retire, then a Roth IRA makes sense because today you pay taxes at a lower rate. People who work and meet the IRS income limits can contribute to a Roth IRA or make pre-tax contributions to a traditional IRA. Contributions to these types of accounts can be made before taxes, unlike IRA contributions that are made after taxes.
For example, if you already have a tax-deferred 401 (k) plan through your employer, you may want to invest in a Roth IRA if you meet the requirements. However, if you are sure that in the future you will be in a lower tax bracket and would prefer today's tax relief, it would be wise to choose the traditional IRA. Unless you're an extremely disciplined saver, you'll end up with more after-tax money in a Roth IRA.