Pay Taxes Now or Later?

That's the main difference between a Roth and a traditional IRA

by: Carole Fleck | from: AARP Bulletin | February 1, 2012

Q. I know that after I reach age 70½ the government will require me to start making withdrawals from my traditional IRA. Can I convert it to a Roth IRA to avoid this?

Crooked dollar bill - converting IRA to Roth will get you out of mandatory withdrawals, but not out of paying taxes on it

Converting IRA to Roth will get you out of mandatory withdrawals — Photo by Erik Dreyer/Getty Images

A. Yes, you could convert the account to a Roth IRA and pay income tax now but avoid distribution requirements in retirement.

The primary difference between a traditional IRA and a Roth IRA comes down to this: take your tax deductions today or enjoy tax-free income in retirement.

In a traditional IRA, your contributions are tax-deductible. So if your income is $30,000 annually, and you contribute $5,000, you will be taxed on only $25,000 in income. After you hit 70½, you will pay taxes on withdrawals that are mandatory each year.

With a Roth IRA, you'll pay taxes on $30,000 in income regardless of your contribution amount. However, you would not be required to take annual distributions in retirement — when to withdraw would be your decision.

To determine which strategy is best for you, consult a tax adviser.

You may also like: Cut your taxes for 2011: 10 ways to get a break.