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Roth IRA vs. Traditional IRA: What's right for you?

Posted by Nicole Gomes on Feb 17, 2022 10:05:55 AM


There are many ways to invest in your financial future. Two of the most common options are a Roth and a traditional IRA. While both accounts will help you prepare for the future, it’s important to understand the differences between the two.

Keep reading to learn about both the Roth IRA and traditional IRA so that you can choose the retirement investment account that’s best for you.

The Key Differences: Roth IRA vs. Traditional IRA

The two biggest things to consider when choosing between a Roth or traditional IRA are taxes and timing. Any contributions made to a traditional IRA are tax-deductible. But, when funds are withdrawn in retirement, the funds are taxed. On the other hand, Roth IRA contributions are not tax-deductible; however, retirement withdrawals are tax-free.

This chart identifies the key differences between these two IRA accounts:

Roth IRA

Traditional IRA

No immediate tax benefit on contributions

Contributions reduce taxable income in the year they’re made

Contributions can be withdrawn at any time without penalties or taxes

Deductions can be phased out based on income level

Eligibility phases out at high incomes

Retirement distributions are taxed as income

Qualified retirement withdrawals are tax-free

There are required minimum distributions at age 72


Consider your Tax Rate

In deciding whether to contribute to a Roth IRA or a traditional IRA, you'll need to think about your present tax rate versus your future tax rate. If you can answer that question with almost certainty, it's much easier to decide which IRA is best.

If you'll be in a higher tax bracket in retirement, you'll want a Roth IRA due to the delayed tax benefit. However, if you expect to be in a lower tax bracket in retirement, a traditional IRA is more advantageous because of the upfront tax deduction.

But if you're like most people, it's hard to anticipate what your tax rate will be decades from now. Thankfully, your tax rate isn't the only way to decide which IRA is ideal.


Check your IRS Eligibility

For some, the decision between a Roth vs. a traditional IRA depends on IRS eligibility rules. Your income decides if you’re eligible for a Roth IRA. It also determines how much of your traditional IRA contributions are tax-deductible.

Income limits change each year, so be sure to check the IRS rules to determine your eligibility.


Why the Roth IRA Is Often the Best Choice

Many find that the Roth IRA is the better option when it comes to saving for retirement. One of the biggest benefits is that the early withdrawal rules are much more flexible with a Roth IRA. While early withdrawals are generally discouraged, you can withdraw from a Roth IRA without penalty or paying income taxes.

Taking money out of a traditional IRA account before retirement often means you’re stuck paying a 10% early withdrawal penalty and paying taxes on the amount that’s withdrawn.

A Roth IRA is also more beneficial in that it has fewer restrictions for retirees. Unlike traditional IRAs, which have required minimum distributions at age 72, the Roth does not. You’re able to let your savings stay and grow as long as you’re alive.

Have more questions about saving for retirement? SL&C team of financial advisors specializes in assisting businesses and individuals with a wide range of financial, accounting, and consulting services throughout New York.

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Topics: Tax Season

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