What Is an IRA?
An Individual Retirement Account (IRA) is a powerful tool designed to help individuals save for retirement while receiving tax advantages. Whether you’re self-employed or looking for an additional way to grow your retirement savings, IRAs offer flexible options with long-term benefits.
The two most popular types of IRAs are the Roth IRA and the Traditional IRA. While both help you save for retirement, they have key differences in how contributions, withdrawals, and tax benefits work.
Roth IRA vs. Traditional IRA: Key Differences
| Feature | Roth IRA | Traditional IRA |
|---|---|---|
| Tax Benefits | Contributions are made after-tax, but withdrawals are tax-free in retirement | Contributions are tax-deductible, but withdrawals are taxed in retirement |
| Income Limits | Yes, income restrictions apply for eligibility | No income limits to contribute, but deductions may be limited if covered by a workplace plan |
| Withdrawal Rules | Contributions can be withdrawn anytime tax-free. Earnings are tax-free after 5 years and age 59½ | Withdrawals before age 59½ incur taxes + a 10% penalty, except for certain exceptions |
| Required Minimum Distributions (RMDs) | No RMDs required | RMDs must start at age 73 (for those born 1951-1959) or age 75 (for those born in 1960 or later) |
| Best for… | People expecting to be in a higher tax bracket in retirement | People expecting to be in a lower tax bracket in retirement |
What Is a Traditional IRA?
A Traditional IRA allows you to contribute pre-tax dollars, reducing your taxable income in the year of contribution. However, you’ll have to pay income tax on your withdrawals in retirement.
Benefits of a Traditional IRA:
- Immediate tax deduction on contributions (subject to income limits if covered by a workplace retirement plan).
- Tax-deferred growth, meaning your investments grow without being taxed until withdrawn.
- Eligibility for tax breaks, such as the Saver’s Credit.
Withdrawal Rules:
- Withdrawals before age 59½ incur ordinary income tax + a 10% penalty, unless qualifying for exceptions (such as first-time home purchase or higher education expenses).
- Required Minimum Distributions (RMDs) must begin at age 73 (or age 75 for those born in 1960 or later).
What Is a Roth IRA?
A Roth IRA is funded with after-tax dollars, meaning contributions are not tax-deductible. However, your money grows tax-free, and both contributions and earnings can be withdrawn tax-free in retirement, provided you meet the rules.
Benefits of a Roth IRA:
- Tax-free withdrawals in retirement.
- No required minimum distributions (RMDs) during your lifetime.
- More flexible withdrawals, since you can withdraw contributions at any time without penalties or taxes.
Withdrawal Rules:
- Contributions can be withdrawn tax- and penalty-free anytime.
- Earnings can be withdrawn tax-free after 5 years and age 59½.
- Some exceptions allow early withdrawal of earnings without penalties (e.g., first-time home purchase, disability, higher education expenses).
Roth IRA Income Limits (2024)
To contribute to a Roth IRA, your modified adjusted gross income (MAGI) must be below certain thresholds:
| Filing Status | Full Contribution Limit | Partial Contribution | No Contribution |
| Single | < $146,000 | $146,000 – $161,000 | > $161,000 |
| Married Filing Jointly | < $230,000 | $230,000 – $240,000 | > $240,000 |
If your income exceeds these limits, you can consider a Backdoor Roth IRA, which allows high-income earners to convert a Traditional IRA into a Roth IRA.
Traditional IRA vs. Roth IRA: Which One Is Right for You?
Choosing between a Roth IRA and a Traditional IRA depends on your current financial situation and expected future tax rate.
- If you expect to be in a higher tax bracket in retirement, a Roth IRA may be a better option since withdrawals are tax-free.
- If you expect to be in a lower tax bracket in retirement, a Traditional IRA could be more beneficial because you’ll receive tax deductions now and pay lower taxes later.
Can You Have Both a Traditional and Roth IRA?
Yes! You can contribute to both a Traditional IRA and a Roth IRA in the same year, as long as your total contributions do not exceed the annual limit of $7,000 ($8,000 if age 50+) in 2024.
Conclusion: Roth IRA vs. Traditional IRA – Which Is the Best Choice?
Both IRAs offer great tax advantages, but the best choice depends on your income, tax strategy, and retirement goals.
- Choose a Roth IRA if you want tax-free retirement withdrawals and do not need immediate tax deductions.
- Choose a Traditional IRA if you want an immediate tax break and expect to be in a lower tax bracket in retirement.
- Consider both if you want to diversify your tax strategy and maximize retirement savings.
Whichever you choose, start investing early to maximize the power of compound growth and secure your financial future!
