Because there are no upfront tax breaks with a Roth IRA, your $6,000 contribution will cost you, yes, a full $6,000. With a traditional IRA, you may be eligible for a tax break that will mean your $6,000 contribution might only really cost you, say, $3,960 out of pocket today. But remember that you will pay taxes on it after you turn 70½ and start withdrawing.
Of course, your tax bracket is a major decision driver on which route to take. And not just the bracket you’re in now, but where you expect to be in retirement. If you’re in the 28% to 39% range now, contributing to a Roth IRA could cost you plenty more up front than it might in your golden years, when your income may be lower and your tax bracket may be, too. But if you think your income will be substantially higher in retirement, the Roth could offer financial solace then and won’t cost as much in taxes now. And then there’s preference: Do you want to pay fewer taxes now or later?
But do you have a crystal ball? Of course you don’t, and not knowing what kind of income you’ll be generating once you’re in retirement can make the Roth versus traditional IRA choice a daunting one.
If you choose the traditional IRA path, some retirement planners encourage you to also set aside roughly $1,500 in estimated tax per annual contribution to help cover the taxes in those retirement years.
A couple other things to consider: You can have both a traditional IRA and a Roth IRA, but your annual collective contributions cannot exceed $6,000 if you’re under 50. You can convert a traditional IRA into a Roth IRA at any time by paying the taxes owed. A combination of both might also offer you tax relief in retirement.