When you’re interested in creating tax diversification within your retirement plans — Traditional IRAs are tax deferred with respect to both contributions and accumulated investment earnings. Roth IRAs, however, are tax free if you are at least 59½ at the time you make the withdrawals and the plan has been in existence for at least five years.
In this way Roth IRAs provide you with income tax diversification. While distributions from other retirement plans become taxable upon withdrawal, your Roth IRA funds come to you completely free from federal income taxes. It’s an excellent strategy, especially if you will continue to be in a relatively high marginal income tax bracket in retirement.
When you want to preserve your money past age 70½ — We’re talking about required minimum distributions (RMDs) here. They kick in at age 70½, and they apply to virtually every retirement plan except for the Roth IRA. Simply put, once you reach that age, you’re required to begin taking distributions based on your remaining life expectancy.
Since Roth IRAs have no RMDs, you can build your investment virtually for the rest of your life. This is an excellent way to continue accumulating retirement assets so that you don’t outlive your money. It’s also an excellent way of preserving more of your estate to pass on to your heirs. Only a Roth IRA can do that for you.
If your income tax liability is either low or nonexistent — Even if you can make a deductible traditional IRA contribution, it may not make sense if you have no income tax liability or if you’re in the 10%, 12% or 22% marginal tax rate bracket. Since Roth IRA money can be withdrawn completely free from income taxes, it is a superior retirement plan to a traditional IRA. The last thing that you should want to do is trade a 10% tax savings now for a potentially higher tax rate on withdrawals in retirement, which is exactly what you’ll do if you make a contribution to a traditional IRA.
If you think you may need access to the money before retirement — Since there is no tax deduction from making a Roth IRA contribution, the amount of the contribution can be withdrawn free from income taxes and penalties, even if the withdrawal happens before you turn 59½. Not so with a traditional IRA if the contributions were tax deductible when made. So if you think you may need the money before retirement, the Roth IRA should be your choice.