Traditional IRA vs. Roth IRA: What's The Difference? Which One Should I Choose? (2024)

FAQs

Traditional IRA vs. Roth IRA: What's The Difference? Which One Should I Choose? ›

The most important difference between the Roth and traditional IRA is their tax treatment. Traditional IRAs have an upfront tax advantage. You get a tax deduction for your contributions in the current year but will be taxed on your withdrawals during retirement. A Roth IRA works the exact opposite.

In general, if you think you'll be in a higher tax bracket when you retire, a Roth IRA may be the better choice. You'll pay taxes now, at a lower rate, and withdraw funds tax-free in retirement when you're in a higher tax bracket.

With a Roth IRA, you contribute after-tax dollars, your money grows tax-free, and you can generally make tax- and penalty-free withdrawals after age 59½. With a Traditional IRA, you contribute pre- or after-tax dollars, your money grows tax-deferred, and withdrawals are taxed as current income after age 59½.

Unlike Traditional IRAs, Roth IRAs (unless inherited) don't require you to take minimum distributions starting at age 73. And similar to a Traditional IRA, you can avoid the early withdrawal penalty for situations such as: Higher education expenses. First-time home purchases.

If you'd prefer to pay taxes now and get them out of the way, or you think your tax rate will be higher in retirement than it is now, consider a Roth 401(k). By paying taxes on that money now, you're shielding yourself from a potential increase in tax rates by the time retirement rolls around.

Even when you're close to retirement or already in retirement, opening this special retirement savings vehicle can still make sense under some circ*mstances. There is no age limit to open a Roth IRA, but there are income and contribution limits that investors should be aware of before funding one.

You can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. However, you may have to pay taxes and penalties on earnings in your Roth IRA.

An IRA can be a key part of your retirement savings strategy. And the good news is there's no limit to the number of IRAs you can have, meaning you can combine the tax advantages of both a traditional and Roth IRA, or even open more than one of the same type of account.

If you're now in one of the higher tax brackets, your tax rate in retirement may have nowhere to go but down. In this case, you're probably better off postponing the tax hit by contributing to a traditional retirement account.

What is better, a 401k or a Roth IRA? ›

The Bottom Line. In a 401(k) vs. Roth IRA matchup, a Roth IRA can be a better choice than a 401(k) retirement plan, as it typically offers more investment options and greater tax benefits. It may be especially useful if you think you'll be in a higher tax bracket later on.

A conversion can get you into a Roth IRA—even if your income is too high. The conversion would be part of a 2-step process, often referred to as a "backdoor" strategy. First, place your contribution in a traditional IRA—which has no income limits. Then, move the money into a Roth IRA using a Roth conversion.

Traditional IRAs have an upfront tax advantage. You get a tax deduction for your contributions in the current year but will be taxed on your withdrawals during retirement. A Roth IRA works the exact opposite. There's no upfront tax advantage.

If you want to keep things simple and preserve the tax treatment of a 401(k), a traditional IRA is an easy choice. A Roth IRA may be good if you wish to minimize your tax bill in retirement. The caveat is that you'll likely face a big tax bill today if you go with a Roth — unless your old account was a Roth 401(k).

There are several approaches you can take. A traditional approach is to withdraw first from taxable accounts, then tax-deferred accounts, and finally Roth accounts where withdrawals are tax free. The goal is to allow tax-deferred assets the opportunity to grow over more time.

If your tax rate will be lower in the future, a traditional IRA may help you make the most of your tax benefits as you can take the deduction on your contribution this tax year and pay taxes on withdrawals in the future at a lower rate. The opposite may be true for Roth IRA contributions.

If you contribute 5,000 dollars per year to a Roth IRA and earn an average annual return of 10 percent, your account balance will be worth a figure in the region of 250,000 dollars after 20 years.

That Income-Related Monthly Adjustment Amount could cost thousands of dollars per year, but a Roth conversion can help avoid that extra cost. While withdrawals from a traditional IRA are part of your MAGI, potentially triggering an IRMAA surcharge, withdrawals from a Roth IRA are not. A lower tax burden for your heirs.

A Roth IRA enables you to take out 100% of what you have contributed at any time and for any reason, with no taxes or penalties. Only earnings and converted balances in the Roth IRA are subject to restrictions on withdrawals.