Roth IRA vs. traditional IRA: Which is better for you?

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A Roth IRA and a traditional IRA (individual retirement account) offer valuable retirement-planning benefits, but with different structures, income limits and pros and cons.

  • Traditional IRA: A traditional IRA helps you save for retirement and might give you a tax break today. For example, if you contribute $4,000 to a traditional IRA this year, you may be able to deduct that amount on your tax return. This allows you to enjoy a nice break on your obligation to the IRS — subject to income limitations — while your investment continues to grow. You can continue to contribute funds up to the annual contribution limit every year: $6,000 for those under 50 and $7,000 for those over 50 in 2021. You can start making penalty-free withdrawals at age 59 1/2, and you must begin making withdrawals by the age of 72. Whenever you do start taking money out, though, you will pay taxes on the deductible contributions you made and the investment gains.
  • Roth IRA: While a traditional IRA defers your taxes, a Roth IRA is not designed to give you immediate tax benefits. So, if you decide to contribute $4,000 to a Roth IRA this year, it’s all after-tax money. The benefits shine when you begin to make withdrawals — all the compounded growth that has built up over the years is yours to keep. The annual contribution limits are the same as a traditional IRA. However, there is no timestamp for when you must make those withdrawals. You can wait longer to access the cash, and if you wanted, you could leave the money in the Roth IRA forever and pass the money on in your estate plans.
Bankrate insight
You can have both a Roth IRA and a traditional IRA. As long as you meet the government’s qualifications, you can put both of these investing vehicles to work and enjoy a balance of tax breaks between now and years into the future.

Roth IRA and traditional IRA: Key differences

The key distinctions between Roth IRAs and traditional IRAs involve two main considerations: taxes and timing. Traditional IRAs offer the potential for tax deductibility in the present, while Roth IRAs are made with after-tax dollars (meaning there is no benefit in the here-and-now). Then, when you withdraw money in the future, traditional IRAs come with tax responsibilities on anything that hasn’t been taxed (deductible contributions and investment earnings), while Roth IRA withdrawals are tax-free.

Both of these IRAs are sound choices that will help you prepare for the future. It’s up to you when you reap the benefit: Now or later.

A common piece of the Roth IRA vs. traditional IRA conversation is the assumption that you’ll be in a lower tax bracket when you retire. While that is possible, it’s also impossible to accurately predict your tax bracket decades down the road. Instead, look at that road to retirement as a downhill ski slope. Think of your savings as a snowball rolling down that slope: You want it to get bigger and bigger as it reaches the bottom.

With that image in mind, it’s important to ask yourself a question: Do you want to carve out a chunk of it for taxes when you’re finally ready to leave the workforce, or would you rather keep that whole snowball for yourself? With a Roth IRA, you’re fulfilling your tax obligation at the top of the hill when the snowball is the size of your fist. At the bottom of the hill, it’s the size of a car. Consider it a way to thank yourself later: You paid the taxes early so that you can enjoy that whole car-sized chunk of cash.

If you’ve been contributing to a traditional IRA throughout all those years, the government will be waiting for its share.

Breaking down the differences

Roth IRA Traditional IRA
After-tax contributions (no tax break today, but tax-free withdrawals when you retire) Pretax contributions (a tax break now, subject to income limitations, but your contributions and all the growth are taxed as income in retirement)
Never required to withdraw money; can pass along in estate plans Must begin making withdrawals starting at age 72

How to check your IRA eligibility

If you or your spouse have earned income from a job, you’ve checked off the first box on IRA eligibility. To take advantage of the tax breaks of an IRA, though, you’ll need to make sure you meet the government’s additional requirements. Income thresholds vary widely based on a few key factors: your filing status, how much you’ll earn this year and whether you also have a workplace-based retirement plan.

For example, if you file as single or head of household in 2021 and are covered by a retirement plan at work such as 401(k), you need to make less than $66,000 to enjoy the full deduction to a traditional IRA. If you’re married and you are earning $208,000 or more, you are unable to contribute to a Roth IRA. Be sure to review the IRS’ updated contribution limits and deduction requirements to verify if you can enjoy the full benefits of an IRA. And if you’re concerned about income restrictions, you can consider setting up a backdoor Roth IRA, which involves some additional complications but can be worth it for high-income taxpayers.

Other considerations

Here are some additional factors to consider when comparing a Roth IRA and a traditional IRA.

Your current age: If you’re earlier in your career, comparing the benefits between a Roth vs. traditional IRA is especially important. The longer you have between now and retirement, the more that the prospect of compounded tax-free growth in a Roth IRA stands out as a big differentiator.

Your family history: While retirement is often discussed in a window around the traditional age of 65, it’s important to note that people have been working longer — and they will continue to do so in the future. If you have a history of longevity in your family and can envision a retirement that stretches well into your 80s or 90s, a Roth IRA’s lack of requirements for withdrawing money can be especially important.

You can have both: As you compare Roth vs. traditional IRAs, you should know that this isn’t an either-or equation. Provided that your annual contributions can stay within the government’s guardrails, you can put both of these investing vehicles to work and enjoy a balance of tax breaks between now and years into the future.

How to choose the right IRA for you

Regardless of how you decide to divide your funds between a traditional IRA or Roth IRA, it’s important to compare options to diversify your investments with an approach calibrated to your risk tolerance and your retirement timeline.

If you want to be in full control over the investing decisions, look for firms that empower you with a full slate of educational offerings about the market and potential places to grow your money. If you would rather put your IRA on cruise control, a target-date retirement fund or robo-advisor that can deliver sophisticated, low-cost investing tailored to your needs will be a simple way to save.

Traditional IRA: Pros and cons

Pros

  • You may be able to enjoy a tax deduction now: The biggest upside to contributing to a traditional IRA comes at tax time. Depending on your income, you may be able to deduct your contributions on your taxes each year to lower your annual earnings and reduce your financial obligation to the government.
  • You can delay your tax bill on your earnings: While that money grows, you won’t need to worry about paying taxes on it in the interim. That will happen when you begin making withdrawals in retirement, and you’ll only pay taxes on money that has not been taxed before: Any contributions that you were able to deduct from previous tax filings, along with investment earnings.

Cons

  • You’ll pay taxes down the road: You may have enjoyed the tax benefits at a younger age, but that perk doesn’t last forever. You’ll pay the tax man on the back end, which means those withdrawals will be split between you and the government.
  • You’re required to withdraw the money: You might not be sure of what you’ll be doing at age 72, but one thing is for certain with a traditional IRA: You’ll have to start taking some money out. You’ll begin making required minimum withdrawals at this point. That minimum amount is determined by an IRS formula that includes the current value of your account and your life expectancy.
  • You’ll probably pay penalties for early access: If you withdraw money early, those funds will be considered in your annual taxable income, and you’ll likely pay an additional 10 percent penalty. There are some exceptions to the rule — using the funds to cover medical bills, unemployment hardship or a down payment on a first home, for example — but you would want to use these funds as a last resort anyway.

Roth IRA: Pros and cons

Pros

  • Your withdrawals are yours to keep: Since you pay taxes on your contributions on the front end, a Roth IRA gives you the big benefit of tax-free growth. The earnings are not subject to any additional taxes.
  • You don’t ever have to withdraw anything: There is no requirement to take any money out of a Roth IRA at any age. Instead, if you wanted to, you could leave this money in longer, or you could leave it in forever and hand it down to an heir or a charity.
  • You can withdraw contributions penalty-free at any time: Since you’ve already paid your taxes on your contributions, there is no early withdrawal penalty to withdraw what you’ve contributed with Roth IRAs.

Cons

  • There are no upfront benefits: Since your contributions are made after taxes, you won’t feel any immediate tax gratification from a Roth IRA.
  • The ease of early withdrawals can be tempting: It may be convenient to be able to dip into your retirement funds, but it’s not a wise move. Withdrawing those contributions early is a one-way street, too. You don’t get to make any additional contributions in later years to make up for any money you take out.

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Written by
Greg McBride, CFA
Chief financial analyst
Greg McBride, CFA, is Senior Vice President, Chief Financial Analyst, for Bankrate.com. He leads a team responsible for researching financial products, providing analysis, and advice on personal finance to a vast consumer audience.
Edited by
Senior editorial director
Reviewed by
Senior wealth manager, LourdMurray