Choosing the right retirement account can make a big difference in your financial future. When it comes to IRAs, you’ll likely face one main choice: Roth vs. Traditional. Both offer tax benefits, but they work in different ways. To make the right decision, you need to understand how each type functions, who benefits most, and when to use them.
What Is a Traditional IRA?
A Traditional IRA lets you save for retirement with pre-tax income. When you contribute, you may reduce your taxable income for that year. Your money then grows tax-deferred until you retire. Once you start withdrawing funds, usually after age 59½, you’ll pay income tax on the money.
If you withdraw early, you’ll likely face a 10% penalty on top of the tax—unless you qualify for an exception. This type of account suits people who expect to be in a lower tax bracket after retirement.
What Is a Roth IRA?
A Roth IRA works differently. You contribute after-tax money, meaning you don’t get a tax break now. However, your investments grow tax-free. When you withdraw funds in retirement, you won’t owe taxes—no matter how much your account has grown.
That makes Roth IRAs ideal for younger workers or anyone who expects to be in a higher tax bracket later in life. The longer you let your Roth grow, the more tax-free benefits you enjoy.
Key Differences Between Roth and Traditional IRAs
The main difference lies in when you pay taxes. With a Traditional IRA, you delay taxes until retirement. With a Roth IRA, you pay taxes now but avoid them later. This timing can greatly affect your total retirement income.
Traditional IRAs may offer larger upfront tax savings, especially for high earners. But Roth IRAs provide tax-free income in retirement, which can ease your financial burden later.
Income Limits and Eligibility
Traditional IRAs are available to anyone with earned income. However, your deduction may be limited if you or your spouse has a workplace retirement plan and your income is too high.
Roth IRAs, on the other hand, have strict income limits. For 2024, you can’t contribute if your modified adjusted gross income is above $153,000 (single) or $228,000 (married filing jointly). If you earn too much for a Roth, you can still consider a backdoor Roth IRA strategy.
Required Minimum Distributions (RMDs)
Traditional IRAs require you to start taking Required Minimum Distributions at age 73. These are mandatory withdrawals that the IRS taxes as income. If you don’t take them, you’ll face a penalty.
Roth IRAs don’t have RMDs during your lifetime. This allows your money to grow tax-free for as long as you want, which is great for estate planning or delaying withdrawals.
Choosing the Right IRA for You
Deciding between a Roth and Traditional IRA depends on your current tax situation, income level, and retirement goals.
If you expect to be in a lower tax bracket later, a Traditional IRA may save you more in the long run. But if you’re early in your career or believe taxes will rise, a Roth IRA could provide greater flexibility and savings.
You don’t always have to choose just one. Many people use both to create a mix of taxable and tax-free income in retirement. This balance gives you more control over your future withdrawals and tax planning.
Converting from Traditional to Roth
You can convert a Traditional IRA to a Roth IRA. When you do, you’ll pay income taxes on the amount converted. This strategy can help if you have a low-income year or want to reduce future RMDs.
Be sure to consult a financial advisor or tax professional before making a Roth conversion. Timing and tax planning are key to getting the most benefit.
Conclusion
Understanding Roth vs. Traditional IRAs gives you more control over your retirement future. Roth IRAs offer tax-free income later, while Traditional IRAs provide tax savings now. Your best choice depends on your current income, future tax expectations, and retirement plans. Take the time to compare both options and choose the one that supports your financial goals.
