Which is better for you? A Roth IRA or a traditional IRA? The answer depends on your individual situation and whether you believe income tax rates will be higher or lower in the future.

The biggest difference between traditional and Roth IRAs is the timing of the tax benefits. The traditional IRA potentially gives you a tax break now.

Contributions are tax-free, if you meet the income requirements. The account grows tax-deferred. You pay ordinary income tax when you begin to take money out.

Furthermore, you cannot leave your money in a traditional IRA to compound tax-deferred forever. The law requires you to begin taking annual minimum distributions (and paying income taxes on them) commencing the year after the one in which you turn 70½.

The Roth IRA, in contrast, doesn’t provide a tax break on contributions. But once the money has been in the account for five years, withdrawals in retirement are tax-free.

Also, since you’ve already paid taxes on your Roth contribution, there are no required minimum distributions once you turn age 70½. You can let assets in a Roth IRA accumulate tax-free for as long as you like.

Note: The deduction for traditional IRAs is “above the line,” meaning you don’t have to itemize in order to get the benefit of the deduction.

To Roth or Not to Roth?

For most people, the biggest factor in deciding between a Roth and a traditional IRA is their expectations for future tax rates. Consider the following:

Generally, if you believe your income tax rate will be higher in retirement than it is now, you may be better off with a Roth IRA.

If you expect your income tax rate will be lower in retirement than it is now, you may be better off with a traditional IRA.

If you earn too much to contribute to a Roth IRA, you may be better off making a non-deductible contribution to a traditional IRA.

There are a number of other factors that could tilt the balance one way or another. For example, a traditional IRA may be better for you if your income for the current year is relatively high, but you can still qualify for a full tax deduction.

You may also prefer a current tax deduction to a Roth IRA if your health is relatively poor, or if you have a low life expectancy in retirement.

Conversely, these circumstances may indicate that a Roth IRA is a better match:

You are relatively young and your money has a long time to compound.

You earn too much to deduct your traditional IRA contribution.

Your income in the current year is relatively low.

You are in a relatively low effective tax bracket.

You expect your earnings to be significantly higher in the future.

You have a long life expectancy in retirement.

You want to maximize the amount of wealth you pass on to heirs.

You don’t want to have to worry about required minimum distributions.

Non-deductible IRAs

Even if you earn too much to deduct traditional IRA contributions in the current year, you can still make non-deductible IRA contributions, up to the maximum contribution limit for your age, regardless of income. Non-deductible contributions still compound tax-deferred.

Once you begin withdrawing them, you only pay income taxes on the growth. This may be a good option if you have no other retirement plan to contribute to, or you make too much money to qualify to contribute to a Roth.