What’s Best for Me? A Roth or Traditional IRA?

What’s Best for Me?

A Roth or Traditional IRA?

While both accounts serve as tax-advantaged accounts, the use of a Roth Individual Retirement Account (IRA) and a Traditional IRA is an important financial planning discussion.

The Main Difference

Contributions to Traditional IRAs are typically made with pre-tax dollars: initially you will use after-tax dollars (e.g., dollars in your bank account) to fund the contribution, you then may be able to deduct those dollars on your income tax return, effectively converting them back into pre-tax dollars. Traditional IRA contributions grow taxdeferred until they are taken out of the IRA, at which time you will pay ordinary income tax on anything withdrawn (note: withdrawals must not occur before age 59 ½ to avoid penalty). Conversely, contributions to Roth IRAs are made with after-tax dollars. Those Roth IRA contributions then grow tax-free and remain tax-free even when you take the money out (assuming that, at the time the money is withdrawn, you are at least 59 ½ years old and the Roth IRA has been open for at least five tax years).

What about required minimum distributions?

A required minimum distribution (RMD) is the amount that you are required to withdraw annually from your IRA. There are no RMDs from your Roth IRA while you are alive, but RMDs from Traditional IRAs are required at age 72, unless you turned 70 ½ in 2019 or earlier.

“People are like stained-glass windows. They sparkle and shine when the sun is out, but when the darkness sets in their true beauty is revealed only if there is light from within.” – Elisabeth Kubler-Ross

Contributions

If you are considering making an IRA contribution, keep in mind that you cannot contribute more than you earned in a year. In addition, the IRS sets forth annual contribution limits; for 2022, total contributions to your Traditional and Roth IRAs combined cannot exceed $6,000 for those under age 50 or $7,000 for those age 50 or older. For 2023, total contributions to your Traditional and Roth IRAs combined cannot exceed $6,500 for those under age 50 or $7,500 for those age 50 or older. In the past, individuals age 70 ½ and older were only permitted to contribute to Roth IRAs but, for tax years beginning after 2019, as long as you have earned income you can contribute to a Roth or Traditional IRA at any age. There are income thresholds that can reduce IRA contribution and deduction limits if you are covered by a retirement plan at work. Permissible Roth IRA contributions also may be reduced or eliminated if your modified adjusted gross income reaches a certain threshold, even if you are not covered by a retirement plan at work.

So then, which is better, a Traditional or Roth IRA?

There are benefits to both, and you don’t have to exclusively use one option over the other. Contributing to a Traditional IRA could give you a tax break right away, whereas the tax benefits of a Roth IRA aren’t realized until later. Generally, those in lower tax brackets and/or a long way from retirement may benefit more from Roth IRAs, whereas those in higher tax brackets and/or closer to retirement may benefit more from Traditional IRAs