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

Sep 20 · 4 min read

Ready to open an IRA and retire like a boss? Find the best IRA for you!

Key Takeaway: In order to maximize your retirement savings, you’ll need to choose the right type of 401(k). Whether it’s a Traditional or Roth IRA, you’ll want to open the one that makes the most sense for your money!

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

If you’ve decided an IRA (Individual Retirement Account) is the best retirement account for you, you’re probably wondering which type of IRA you should open. While there are many different types of IRAs out there, the main two are Traditional and Roth IRAs. Depending on which one you choose, you could either save yourself a lot of money in taxes or end up having a larger tax bill than you expected in retirement. In order to pick the right IRA for you and maximize your retirement savings, you’ll need to know the main differences between the two. Let’s Get Whyze and find out which IRA is best for you!

What Is A Traditional IRA?

Taxes

With a Traditional IRA, you add money to your retirement account before paying taxes on it. This allows you to grow pre-taxed money and lower your taxable income for the year. While growing your money without paying taxes may sound like an immediate “no brainer”, there is a catch. With a Traditional IRA, you will have to eventually pay taxes on your money when you take it out of your account during retirement. The money you withdraw from your account will be taxed based on what income tax bracket you fall into at that time. This could either hurt or help your pockets depending on your income and tax rates during your retirement. Generally, if you’re in a high tax bracket now but plan to be in a lower one during retirement, a Traditional IRA is a better choice for you.

Withdrawals (Access To Your Money)

With a Traditional IRA, you won’t be able to start withdrawing your money penalty-free until the age of 59 ½ ( or earlier if you qualify for early distributions ). If you decide to withdraw money before this age, you’ll be charged a 10% penalty and still be required to pay income taxes on the amount you cashed out. You’ll also be required to start withdrawing cash from your account at the age of 70 ½. This makes it harder to pass down your retirement savings to your family.

What Is A Roth IRA?

Taxes

Your other option is a Roth IRA. A Roth IRA lets you add money to your retirement account after paying taxes on it. In return for paying taxes upfront, you will not have to pay taxes when you withdraw money from your IRA later in life. This even includes avoiding taxes on the gains of your investments within your IRA (take that Uncle Sam!). Something you can’t do with a Traditional IRA. If you plan to retire in a higher tax bracket than you are now, choosing a Roth IRA could save you some money in taxes.

Withdrawals (Access To Your Money)

Just like a Traditional IRA, a Roth IRA also has rules for withdrawing your money but they are slightly different. At any point, you can withdraw your contributions from your IRA tax and penalty-free. This means that any money you put into your Roth IRA is available to you at any time. Your gains from your contributions will have to stay in your Roth IRA until you are 59 ½ ( or earlier if you qualify for early distributions ) if you want to avoid a 10% penalty though. With Roth IRAs, you won’t have to worry about being forced to withdraw money at the age of 70 ½. Unlike a Traditional IRA, this makes it easier to pass down your retirement savings to your family (hello generational wealth).

IRA Contribution Limits

No matter which type of IRA you choose, you will be limited to the same amount of money you can contribute to your account. As of 2019, you are allowed to add up to $6,000 per year to your IRA. If you’re 50 or older, you’ll be able to contribute an extra $1,000, allowing you to add a total of $7,000 per year.

If you happen to have multiple IRAs (we will get to this in a minute), you can contribute to both accounts in the same year, as long as you keep your total contributions under those limits. Learn more about IRA contribution limits here .

Which One Is Best For You?

So now that you know the main differences and similarities between a Traditional and Roth IRA, which one is the right IRA for you? To figure this out, you should ask yourself two questions:

1. Do I Even Qualify?

Depending on your income and tax filing status, you may not be eligible to contribute to a Roth IRA. To keep things simple, if you file your taxes as:

  • Single or head of household (or married filing separately if you did not live with your spouse during the year): If you make less than $122,000, you are eligible to contribute to a Roth IRA. If you make between $122,000 to $136,999 you can add to a Roth IRA but not to the maximum amount.
  • Married filing jointly or qualifying widow(er) : If you and your spouse make less than $193,000, you are eligible to contribute to a Roth IRA. If you collectively make between $193,000 to $202,999 you can add to a Roth IRA but not to the maximum amount.
  • Married filing separately (if you lived with your spouse at any time during the year): If you make less than $10,000, you are eligible to contribute to a Roth IRA but not to the maximum. If you make anything over $10,000, you won’t be able to add to a Roth IRA.

2. What Do I Predict My Tax Bracket Will Be In Retirement?

If you predict your income tax rate will be higher in retirement than what it is today, your best bet may be to get a Roth 401(k). This is a great choice if you are currently in a low tax bracket but plan to move into a higher tax bracket by retirement. Choosing a Roth IRA will allow you to pay less in taxes over the long haul, equaling more money for you. If you believe your income tax rate will be lower in retirement, a Traditional 401(k) may be the better option for you. This choice makes perfect sense if you are a high-income earner looking to delay your tax payments until your tax rates are lower.

Should I Invest In A Traditional & Roth IRA?

If choosing between a Traditional or Roth IRA is giving you anxiety, you may want to try actually having both if you qualify. Splitting your IRA contributions between both account types will eliminate the guessing of which one is the best for you. Making this move will also help you diversify your tax situation in retirement, just in case your initial prediction about your future tax rate is wrong.