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By Christine Benz | 04-13-2012 09:00 AM

Slott: Most Better Off With a Roth IRA

The Roth IRA is typically a more powerful choice than the traditional IRA, especially for younger investors, says retirement expert and author Ed Slott.

Christine Benz: Hi, I'm Christine Benz for Morningstar.

It's do or die time if you'd like to make an IRA contribution for the 2011 tax year. Joining me on the phone to discuss whether it's best to make a traditional or a Roth IRA contribution is retirement expert and author Ed Slott.

Ed, thank you so much for joining us.

Ed Slott: Great to be here, thanks.

Benz: Ed, the starting point if you are trying to squeak in a last minute IRA contribution, your financial services provider will ask you, what kind of contribution do you want to make? Do you want to make a Roth or traditional? And obviously, that's a big question, but what are some of the key factors that should go into that decision-making process?

Slott: Well, it is a big decision because it affects the rest of your life, especially if you're planning on having any decent size retirement account.

So what they're really asking you, forget about IRA or Roth, do you want tax deferred or tax free, and that's a big difference. Tax deferred is a traditional IRA where you make a contribution to your IRA, and it may or may not be deductible--that's something you have to look at also--and you get a current tax deduction. So you save a few bucks currently, but then, ... in fact you pay for it for the rest of your life. So, in my view, I think you are better off, most people, with a Roth IRA, where you don't get a tax deduction, but you contribute the money to a Roth, if you qualify--and that goes for both, the separate qualifications for both--and the money grows tax-free forever, income tax-free forever. So if I'm looking ahead to retirement, especially the younger you are, the more powerful a Roth is, because the Roth grows tax-free for the rest of your life, and then at retirement the last thing you want to worry about is taxes, and with a Roth you don't have to. But it comes with a cost. You have to pay for it upfront. You don't get a tax deduction. So you won't get that extra few bucks in your pocket at tax time.

Benz: So what if a person is getting fairly close to retirement and realistically is probably not going to be in a higher tax bracket in retirement then they are now because they haven't saved very much. For such a person would you still recommend a Roth or do you think a traditional IRA, if you can deduct the contribution, is the way to go?

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