Traditional vs. Roth IRA: Which Is Right for You?

What we’ll cover:

• With a Traditional IRA, you contribute pre-tax dollars and your money grows tax-deferred until retirement
• With a Roth IRA, you pay taxes on money you contribute today, but withdrawals in retirement are tax-free
• Reasons to consider a Roth IRA: tax-free withdrawals, tax diversification and overall flexibility
• Reasons to consider a Traditional IRA: your contributions today are tax-deferred, fewer income restrictions

You’ve probably heard of the two main types of Individual Retirement Accounts (IRAs): Traditional IRA and Roth IRA.

Both Traditional and Roth IRAs could help you save money for the future while potentially offering some tax advantages.

With IRAs, like all retirement accounts, the goal is the same: You put money into that account (contributions), that money generally grows over time (earnings), and then you take that money out (withdrawals) in retirement.

When it comes to taxes, here’s the main difference between a Roth vs. Traditional IRA:

• With a Roth IRA, you contribute money that you’ve already paid taxes on, and your withdrawals in retirement are tax-free.
• With a Traditional IRA, your contributions are made pre-tax and grow tax-deferred (meaning you pay taxes later) until you withdraw your money in retirement. If you qualify, your contributions may be tax-deductible (more on that below).

There are other differences between a Traditional IRA vs. Roth IRA outlined below. If you’re considering opening one, first check your eligibility.

• For Roth IRAs, your income will determine whether you can contribute partially, fully or at all.
• For Traditional IRAs, there are two main factors that will determine how much of your contribution you can deduct from your taxes: Your income and whether you or your spouse are covered by a workplace retirement plan.

Roth IRA vs. Traditional IRA: What’s the Difference Between Them?

Reasons to consider a Roth IRA

Tax-free withdrawals in retirement

If you think you’ll be in a higher tax bracket when you retire, a Roth IRA might work in your favor because you’re paying taxes up front at a lower rate.

You might also just enjoy the thought of not paying taxes on your retirement income. Assuming you follow the rules associated with a Roth IRA, the money you withdraw is tax-free.

Tax diversification if you have other retirement accounts

If you contribute pre-tax earnings to other retirement plans, such as a 401(k), withdrawals from those accounts will generally be considered taxable income. If eligible, having a Roth IRA in the mix might be a good way to diversify your retirement income since you’ll be able to withdraw from that account without paying tax. 

Flexible early withdrawal rules

Although you should proceed with caution if you’re considering an early withdrawal, accessing money in a Roth IRA ahead of retirement can be a little easier than it would be versus a Traditional IRA. Contributions to your Roth IRA can be withdrawn at any time, for whatever reason, tax-and penalty-free.

That being said, you may have to pay taxes and penalties on your earnings (the money you’ve made on your contributions). The IRS outlines what you need to know (including any exceptions), but two main factors are whether you are over or under age 59½, and if you’ve held the account for at least five years.

Reasons to consider a Traditional IRA

Potentially lower your taxes today

Depending on your circumstances, your contributions to a Traditional IRA may be tax-deductible, which effectively lowers your taxable income.

A lot of this depends on your annual income, tax filing status (single, married filing jointly, married filing separately), and whether or not you’re covered by a retirement plan at work.

We know reading up on the IRS rules probably makes your eyes glaze over, but we’d recommend doing so if you’re hoping for a tax deduction. Otherwise, talk to your tax advisor or tax professional.

No income restrictions for contributing

You’re only allowed to contribute to a Roth IRA if you meet certain income rules (see “Income Limits” in the table above). With a Traditional IRA, you can contribute up to the full amount permitted regardless of your income. However, keep in mind that above a certain income, you may not qualify for a tax deduction on your contributions.

If you think you’ll be in a lower tax bracket in retirement

If you think your income will be lower in retirement than it is now, your effective tax rate may be lower as well. For instance, this could be true if you are in the peak of your career and expect a lower income in retirement. If that’s the case, the potential benefit of a tax deduction today may be worth more than tax-free withdrawals from a Roth IRA.

Traditional IRA vs. Roth IRA: Deciding what’s best for you

For some, a Roth IRA can be an obvious choice because of the tax-free withdrawals in retirement and overall flexibility. On the flip side, the biggest draw for a Traditional IRA is the potential tax break up front. This may be a great incentive to save for retirement.

At the end of the day, choosing between a Roth IRA vs. Traditional IRA is your call (just remember to check your eligibility first). Once you have a solid grasp on the differences between the two, you can decide what’s best for you.