Roth IRA Versus Traditional IRA

It’s never too early to start saving for retirement and an important step in that process is identifying which retirement savings account is right for you. One of the most common account types is an IRA, which allows an individual to save for retirement in a tax-advantaged way. If you decide to open one, you’ll be given two options: Roth or Traditional. To help you decide which one will work best for your unique situation, we’ve outlined a breakdown of these two IRAs.

Do You Qualify?

Before diving into the specifics, it’s important to note that not everyone qualifies for a Roth IRA. In order to qualify in 2021, singles must have a Modified Adjusted Gross Income (MAGI) of less than $139,000. As for married couples, they must have a MAGI of less than $206,000. Based on these numbers, a majority of people will qualify for this type of IRA, but if you happen to have a larger salary, a traditional IRA is the type you’ll need to select.

What’s the Difference?

The most significant difference between a Roth IRA and a traditional IRA is what type of tax break you’ll receive. For traditional IRAs, every contribution you make is tax deductible, which means it reduces your taxable income at the end of the year. However, every time you make a withdrawal during your retirement, that amount will be taxed. In contrast, a Roth IRA is the exact opposite. When you make a contribution, that amount is not tax deductible but when you start making withdrawals in the future, they will be tax-free. When deciding which IRA is right for you, it’s important to consider what’s more important to you: An immediate tax break or tax-free withdrawals in the future?

Advantages and Disadvantages

Here’s a quick breakdown of the perks and drawbacks of these two IRA options:

Roth IRA

  • There are no immediate tax breaks, but it provides tax benefits down the road in the form of tax-free withdrawals.
  • With a Roth IRA, the early withdrawal rules are much more flexible than with a traditional IRA.
  • There are no required minimum distributions, which means you’re not required to withdrawal any money at any age. Technically, you could leave the funds untouched for decades and watch as your returns increase, year after year.

Traditional IRA

  • With a traditional IRA, you receive an immediate tax break since all contributions are tax deductible. However, when it comes to making withdrawals in the future, these are taxed.
  • The early withdrawal rules are strict. If you decide to dip into the fund, you’ll likely be charged a 10% early withdrawal fee.
  • Traditional IRAs require you to start making minimum distributions, also known as required withdrawals, starting at the age of 72.

Contact Us

Just like with many elements of retirement planning, choosing the right IRA can be stressful. If you’d like to speak with one of our representatives about which option is the best fit, please contact us today.