IRA 101: Decoding Roth vs. Traditional to Find Your Perfect Match
When planning for retirement, Individual Retirement Accounts (IRAs) can be a game-changer. But with two main options—Roth and Traditional IRAs—how do you decide which one suits your financial goals? Let’s dive into the basics of each and help you make an informed decision.
What Is an IRA?
An IRA is a tax-advantaged retirement account designed to help you save for your golden years. Contributions can grow over time thanks to compounding, and you can choose from a wide range of investment options such as stocks, bonds, and mutual funds.
The two most common types are Traditional IRAs and Roth IRAs—each with unique benefits and tax implications.
Traditional IRA: Save Now, Pay Taxes Later
Tax Benefits: Contributions may be tax-deductible, reducing your taxable income for the current year (income limits apply if you have a workplace retirement plan like a 401(k)).
Growth: Investments grow tax-deferred, meaning you won’t owe taxes until you withdraw the funds in retirement.
Withdrawals: Distributions are taxed as ordinary income. Early withdrawals before age 59½ incur a 10% penalty (with some exceptions).
Required Minimum Distributions (RMDs): Starting at age 73, you must begin taking RMDs, whether you need the money or not.
Roth IRA: Pay Now, Enjoy Tax-Free Later
Tax Benefits: Contributions are made with after-tax dollars (no immediate tax deduction), but qualified withdrawals in retirement are tax-free.
Growth: Your investments grow tax-free forever.
Withdrawals: Contributions can be withdrawn anytime without taxes or penalties. However, earnings withdrawn before age 59½ may incur taxes and penalties unless it’s a qualified distribution.
No RMDs: Roth IRAs don’t require you to take distributions during your lifetime, making them a great tool for legacy planning.
Choosing Between Roth and Traditional IRAs
The best IRA for you depends on your current and future financial situation. Consider these factors:
Your Current Tax Bracket
If you’re in a higher tax bracket now but expect to be in a lower one during retirement, a Traditional IRA may make sense. You’ll benefit from immediate tax savings and pay lower taxes on withdrawals later.
If you’re in a lower tax bracket now, a Roth IRA might be better. Pay taxes on contributions now while your rate is low, then enjoy tax-free withdrawals in retirement.
Your Future Tax Expectations
Expecting tax rates to rise? A Roth IRA provides a hedge against future increases by locking in today’s tax rates.
Unsure about the future? Diversifying by contributing to both types (if eligible) can provide flexibility.
Access to Funds
If you need flexibility, a Roth IRA is more accessible since contributions (not earnings) can be withdrawn anytime without penalties or taxes.
Age and Income Limits
Roth IRAs have income eligibility limits. For 2025, single filers earning over $153,000 and married couples earning over $228,000 aren’t eligible to contribute directly.
Traditional IRAs don’t have income limits for contributions, but deductibility may be restricted based on your income and access to a workplace retirement plan.
RMDs
If you don’t want to be forced to withdraw money in retirement, a Roth IRA is ideal.
Final Thoughts
The choice between Roth and Traditional IRAs ultimately boils down to your current tax situation, long-term retirement goals, and personal preferences. For many, contributing to both can be a savvy move to balance tax advantages and flexibility.