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Roth IRA vs. Traditional IRA: Which One Fits Your Future?

Roth IRA or Traditional IRA? Compare the key benefits, tax advantages, and eligibility rules to choose the best for you.
Everaldo Santiago
Everaldo Santiago
December 10, 2024 · 3 minutes
134

Ready to choose the right IRA for your retirement?

When you’re planning for retirement, you have a lot of choices. Among the most popular are the Roth IRA and the Traditional IRA.

Both are solid options, but they have some key differences that can make one a better fit depending on your financial situation. Let’s break down how each account works and help you decide which one might be best for you.

Your choice between Roth and Traditional IRA depends on your goals. (Photo by Freepik)

Roth IRA vs. Traditional IRA: Let’s compare

1. Taxes: pay now or pay later?

Here’s the first big question: Do you want to pay taxes now or later?

  • Roth IRA: With a Roth IRA, you contribute money that’s already been taxed. This means you don’t get any tax break right now, but when you retire, you can take all your withdrawals—both contributions and earnings—tax-free. This is great if you think you’ll be in a higher tax bracket in retirement.
  • Traditional IRA: A Traditional IRA lets you contribute pre-tax dollars, so you get an immediate tax break. However, when you take money out in retirement, it’s taxed as regular income. If you think you’ll be in a lower tax bracket in retirement, this might be a better deal for you.

2. Contribution Rules: Can you even contribute?

Here’s where things get a little tricky.

  • Roth IRA: To contribute to a Roth IRA, you need to fall within certain income limits. For example, in 2024, if you’re a single filer and you make more than $153,000, you won’t be able to contribute the full amount.
  • Traditional IRA: With a Traditional IRA, there’s no income limit for contributing, but whether or not you can deduct your contributions from your taxes depends on your income and whether you have access to a workplace retirement plan.

Even if you can’t deduct your contributions, the money will still grow tax-deferred.

If you earn too much for a Roth IRA, you can still contribute to a Traditional IRA, and then use a “backdoor Roth IRA” strategy to convert those funds into a Roth IRA.

3. Withdrawals: What happens when you need it?

This is another key difference: how and when can you get your hands on the money?

  • Roth IRA: The best part about the Roth IRA is that you can pull out your contributions (but not your earnings) anytime without paying taxes or penalties. But if you want to take out earnings, you need to be at least 59½ years old and have had the account for at least five years. Once those conditions are met, all your withdrawals—both contributions and earnings—are tax-free.
  • Traditional IRA: With a Traditional IRA, if you take money out before 59½, you’ll face a 10% penalty plus regular income tax. When you reach 73, the IRS will make you start taking withdrawals, called required minimum distributions (RMDs), whether you need the money or not.

If you want more flexibility, the Roth IRA is your friend. But if you’re planning to leave your savings alone until retirement, the Traditional IRA offers a more immediate tax benefit.

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4. Estate planning: what about your heirs?

If you’re thinking about leaving your retirement savings to your family, a Roth IRA is a great choice. Your beneficiaries can inherit the account and take withdrawals tax-free, as long as they empty it within 10 years.

In contrast, with a Traditional IRA, your heirs will have to pay taxes on any withdrawals, which could lead to a bigger tax bill for them. So, if you want to leave a tax-free inheritance, the Roth IRA is probably the way to go.

How to Decide Which One is Best for You

Taxes:

  • Roth IRA is better if you expect higher taxes in retirement.
  • Traditional IRA is good for reducing taxable income now.

Income:

  • If you earn too much for a Roth, the Traditional IRA is still a solid option.

Withdrawal flexibility:

  • Roth IRA offers more flexibility for early withdrawals.

Heirs:

  • Roth IRA is ideal if you want to leave tax-free money to your family.

Conclusion

Choosing between a Roth IRA and a Traditional IRA depends on your financial situation. If you want tax-free growth and flexibility, go for a Roth IRA.

If you need a tax break now and can handle taxes in retirement, a Traditional IRA might be better.

The great part? You can contribute to both! Start saving today for a more secure retirement.