Roth vs. Traditional IRAs

Saving for retirement is important, and if you don’t have access to a workplace savings account an individual retirement account (IRA) might be your best option. You may be considering, though, how to choose between traditional IRA vs. Roth IRA. This is not an easy decision, and it will have a big influence on your future. Make sure you know everything you need to know about the differences between traditional IRAs and Roth IRAs before making the decision. If you want help planning your retirement, consider finding a financial advisor to help using SmartAsset’s free financial advisor matching service.

Roth vs. Traditional IRAs: The Basics

The investing portion of these two options works exactly the same. You put money into your account and invest it as you please. Mutual funds and exchange-traded funds (ETFs) are the most popular options, but you can also invest in stocks, bonds and other securities. You keep investing while you work and see your account grow, thanks to compound interest. When you retire, you start taking the money out, often as monthly distributions.

The difference between the two comes when you consider taxes. Contributions to a traditional IRA are tax-deductible, meaning that every dollar you contribute reduces your taxable income, up to the IRS limit, which stands at $7,000 in 2024, up from $6,500 in 2023. The money grows without being taxed until you start taking distributions. When you reach retirement and start taking distributions, the money is taxed as normal income.

In some states, however, IRA benefits are exempt from state income taxes. If you have a traditional IRAs, you’ll need to take required minimum distributions (RMDs), which kick in when you hit age 70 1/2. You can’t leave the money in the account to grow indefinitely. You also can’t contribute to your traditional IRA after age 70 1/2.

A Roth IRA, on the other hand, are funded with after-tax dollars. You can’t deduct your contributions. Because you pay taxes when you put money in the account you don’t have to pay taxes when you take the money out, either in retirement or at any time before retirement. Roth IRAs don’t have RMDs so you can take money out only as and when you need it. Here’s another Roth IRA perk: You can continue contributing to a Roth IRA no matter how old you are. This means you can contribute for as long as you work, even if that is into your 70s.

Roth vs. Traditional IRA: How to Choose

When deciding between a traditional and a Roth IRA it’s helpful to think about your tax bracket. If you are in a relatively high tax bracket now and think that your tax bracket will be lower in retirement, a traditional IRA makes more sense. If you are in a very low tax bracket now, though, and expect your income tax rate will be much higher when you retire, a Roth IRA may be a better choice.

If you already have a 401(k) through your job, you’re getting a lot of the benefits of a traditional IRA already. Your contributions lower your taxable income and your account grows tax-deferred. Plus, 401(k) plans have higher contribution limits than IRAs. So, if you already use a 401(k) you may want to diversify your retirement holdings by opening a Roth IRA on the side. That way, when you hit retirement, you’ll have at least one source of tax-free income.

Your Accounts, in Retirement and Beyond

As we mentioned, one of the main advantages of a Roth is that they don’t have RMDs. That means that you never have to tap your savings if you have other sources of retirement income to support you. For folks with plenty of money who are concerned with estate planning, Roth IRAs have serious appeal.

Once you have a Roth IRA you can leave it to your heirs in your will. You can continue contributing to it every year of your life, making it a great way to accrue tax advantages. If you have income or gains from taxable accounts, you can use them to fund a Roth IRA.

For the 2023 tax year, there is an income limit for contributing to a Roth IRA of $153,000 for singles and $228,000 for married couples filing taxes jointly. You can, though, do a backdoor Roth conversion. The income limits for 2024 are $161,000 and $240,000, respectively.

Simply contribute to a non-deductible traditional IRA and then make a rollover from that IRA to a Roth IRA. You’ll have to pay taxes on the money you roll over, but then you’ll be good to go with your Roth IRA. Keep in mind, though, that the Roth IRA backdoor conversion option might not be around forever. Some reformers say it’s a loophole that needs to be closed to keep the wealthiest Americans from accessing it.

Bottom Line

Around half of Americans don’t have any retirement accounts to their name. If you’re choosing between a Roth and a traditional IRA you’re in a privileged position. Consider the tax and estate planning implications of deciding between a Roth IRA and a traditional IRA. And remember, any time you open a new investing account you should shop around until you find an account with low fees. Fees eat into the value of your retirement holdings over time. Opt for low fees and you’ll keep more of your hard-earned dollars.

Retirement Tips

Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Use SmartAsset’s free retirement calculator to get a sense of it you’re on track to meet your goals.