Roth IRA vs. Traditional IRA: Differences, Benefits, and Which to Choose? (2024)

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• A traditional IRA is funded by pre-tax income, while Roth IRAs are funded by after-tax dollars.
• Choosing between a traditional or Roth IRA depends on your financial situation and preferences.
• Roth IRAs are generally the best option for most pre-retirees.

Individual retirement arrangements (IRAs) are some of the best retirement plan options for people without access to a 401(k) or pension plan. Two of the most common types of IRAs are traditional and Roth. When considering opening an IRA, most people will compare the two.

Traditional and Roth IRAs have different tax benefits, income eligibility, and withdrawal rules. Here is how traditional and Roth IRAs compare, and how to determine which is right for you.

Understanding IRAs

An IRA is a type of individual retirement account offered by financial institutions such as credit unions, brokerages, and banks. Unlike a 401(k) offered by an employer, IRAs can be opened by nearly anyone at any time.

The best IRA accounts offer the same tax advantages as a 401(k) plan but with greater investment flexibility. With an IRA, you can allocate a portion of your portfolio to alternative assets like precious metals, real estate, and digital currencies. Unfortunately, you won't get the same oversight as you would with an employer-sponsored 401(k).

Certain online brokerages offer specialized IRAs, including:

• Self-directed IRAs
• Gold IRAs
• Bitcoin IRAs

Overview of Roth and traditional IRAs

Roth and traditional IRAs are two of the best IRA accounts for growing your nest egg. However, they have key differences. One may be better for you depending on your preferred tax benefit, annual income, and personal preferences.

"People assume you only have to have one type of IRA, but that's not the case," says Liz Young, head of investment strategy at SoFi Invest®.

A Roth IRA may make sense at one point in your life, while a traditional IRA can make sense at another. At times, you'll want to keep both tax-advantaged accounts open.

Tax benefits of Roth and traditional IRAs

Tax treatment of Roth IRA contributions

Roth IRAs are funded with after-tax dollars. You'll contribute already taxed money into your account for the benefit of tax-free growth and withdrawals during retirement. This tax advantage is best for those who expect to land in a higher tax bracket during their post-working years.

Tax treatment of traditional IRA contributions

Traditional IRAs are funded by pre-tax dollars (money yet to be taxed), so you won't be taxed on that money until you start withdrawing. The benefit is tax-deductible contributions today and tax-deferred retirement savings in the future. It's available to all income brackets.

"As your income grows and you start earning more money and [are] pushed into higher tax brackets, a traditional IRA starts to make more sense," says Kathleen Kenealy, CFP and founder of Katapult Financial Planning.

Certain higher-income workers can't qualify for a Roth IRA. This, plus the fact that employees earning large salaries today are more likely to land in a lower tax bracket during retirement, makes traditional IRAs the go-to. However, the highest-income earners may no longer qualify for a full tax deduction if their annual income exceeds the yearly limit (more on this below).

Contribution limits and eligibility

Contribution limits for Roth and traditional IRAs (2024)

The IRS sets the same annual contribution limits for both Roth and traditional IRAs. Annual contribution limits generally increase by $500 each year. Brokerage and employer-match contributions aren't counted toward your maximum contribution amount.

In 2024, folks under 50 can contribute up to $7,000 to a traditional or Roth IRA. If you're 50 or older, you can contribute up to $8,000.

Deductibility of traditional IRA contributions

Traditional IRA contributions may be tax-deductible depending on your modified adjusted gross income (MAGI) and whether you (or your spouse) have a workplace retirement plan. You can deduct contributions in full if you and your spouse don't have access to a 401(k) plan, 403(b), or other employer-sponsored plan.

The maximum income limit is $87,000 for single filers and $143,000 for couples in 2024. If you make $143,000 or more, you won't be able to deduct your IRA contributions.

If you're in the income phase-out range, you may still qualify for a partial tax deduction even with a workplace retirement plan. Single individuals with an income of over $77,000 and less than $87,000 can be eligible for a partial deduction. Married couples filing jointly can receive partial deductions with income of more than $123,000 and less than $143,000.

Qualifications for Roth IRA contributions

Not everyone is eligible to contribute to a Roth IRA. High-net-worth individuals exceed the income threshold set by the IRS. In 2024, individuals must have a MAGI under $161,000. Married couples can be eligible for Roth IRA contributions with a combined MAGI under $240,000.

Catch-up contributions for age 50 and older

Those 50 or older can make additional catch-up contributions to their IRA. In 2024, you can contribute an additional $1,000 to a traditional or Roth IRA, making the maximum contribution limit $8,000.

Withdrawal rules and requirements

You shouldn't withdraw from a traditional IRA or Roth IRA until you are at least age 59½. However, delaying withdrawals of retirement savings for as long as possible is generally recommended by financial advisors.

The IRS sets this rule to discourage people from misusing retirement savings and encourage long-term growth. That said, you may qualify for a penalty-free withdrawal when faced with certain hardships, such as permanent disability, loss of a job, or home repairs.

Prematurely withdrawing from an IRA typically results in a 10% penalty fee on the amount withdrawn.

Rules for traditional and Roth IRA withdrawals

Distributions, or withdrawals, from traditional IRAs are taxed according to your tax bracket in retirement. This is especially beneficial for those who expect their income to be in a lower tax bracket during their retirement years than their working years.

On the other hand, Roth withdrawals have more flexibility. There's a mandatory five-year waiting period for Roth IRA withdrawals. Withdrawing before your account is at least five years old subjects those funds to income tax.However, you can prevent getting re-taxed after the five-year period and if:

• The money is used to purchase your first home up to $10,000.
• Or you become permanently disabled.

Some people use a Roth IRA as a robust savings account or emergency fund because they can withdraw their original contributions (excluding investment gains and compound interest) penalty-free at any time. While this flexibility may save you from being penalized for an early withdrawal, it's best practice to leave your retirement savings untouched for as long as possible for maximum growth potential.

Required minimum distributions (RMDs)

You must start taking distributions, known as required minimum distributions (RMDs), by April 1 of the year after you turn 72 (or 73) and by December 31 of later years after that. Roth IRAs do not have RMDs.

If you don't start taking RMDs, the amount not withdrawn from your account is subject to a 25% excise tax from the IRS. But you can request the IRS to waive the excise tax if you miss your RMDs deadline and feel you have a justifiable argument. The proper form to request a waiver is Form 5329.

Designated beneficiaries of an inherited IRA must take RMDs starting a year after the original owner's death. However, the account must be open for at least 5 years before withdrawals. In that case, the IRS gives beneficiaries 10 years to start taking withdrawals.

Choosing between Roth and traditional IRAs

Factors to consider

When choosing between opening a Roth or traditional IRA, make sure to consider factors such as:

• Preferred tax treatment
• Current and expected future tax rates and income
• Roth IRA eligibility
• Early withdrawal options
• Required minimum distributions (RMDs)

Which is best: Roth IRA vs. traditional IRA

If there had to be a winner between the two, it would be the Roth IRA. It offers tax-deferred growth, tax-free withdrawals, no RMDs, and more flexible early withdrawal rules. Roth IRAs can even be used for estate planning. Since you aren't required to make withdrawals, you can name a family member as a designated beneficiary.

The downside to a Roth IRA is that it's unavailable to high-income individuals. Another potential downside is the five-year rule, but this won't be an issue in most cases.

A traditional IRA isn't without its benefits, either. It offers tax-deferred growth, deductions, and the advantage of an initial tax break. Opening a traditional IRA is especially appealing if you don't already have access to a traditional 401(k) or 403(b). Traditional IRAs are also better for those who expect to be in a lower income bracket during retirement.

FAQs about traditional vs. Roth IRAs