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Traditional or Roth: which IRA works best for you?

If you are looking to save — or save more — for retirement, an IRA can be an excellent choice. Offering tax breaks, portability, and a wide variety of investment options, IRAs have been popular with retirement savers since their debut in 1975.

When considering an IRA, one of the first decisions you’ll need to make is whether a traditional or a Roth IRA best suits your needs. The two types of accounts are similar in many ways, but they differ in their tax treatment and several other important areas. Below are summaries of the two.

Traditional IRAs

With a traditional IRA, contributions are generally made on a pretax basis — you may qualify to deduct them from your income when you file your taxes. You pay taxes only when you withdraw the money. That means that your contributions and earnings grow tax-deferred.

If you or your spouse have taxable compensation, you may contribute up to $6,000 to a traditional IRA for 2022 or $7,000 if you are age 50 or older. Withdrawing funds before age 59-1/2 may result in a 10% early withdrawal tax, in addition to other taxes owed.

See the IRS web page on traditional IRAs to find out if you qualify for a full or partial deduction. Traditional IRAs are also subject to required minimum distribution (RMD) rules, which state that you must begin taking minimum withdrawals after you reach age 72.

Roth IRAs

With a Roth IRA, contributions are made on an after-tax basis (they’re not deductible), but distributions in retirement are generally tax-free. Roth IRA contributions may be limited or not allowed if you make over a certain income level. See the IRS web page on Roth IRAs to determine if you are eligible to contribute to a Roth IRA.

If you are within the eligible compensation range, you may contribute up to $6,000 to a Roth IRA for 2022 or $7,000 if you are age 50 or older. Withdrawing funds before age 59-1/2 may result in a 10% early withdrawal tax, in addition to other taxes owed. Roth IRAs must also be held for at least five years to avoid withdrawal penalties. But unlike traditional IRAs, they are not subject to RMD rules during the account owner’s lifetime.

Choosing between the two

Which type of IRA is best for you? That will depend on a several factors.

  • If you need the tax deduction now, a traditional IRA may be the better option. But if your goal is to minimize taxes in retirement, a Roth may be the way to go.
  • If you expect to be in a lower tax bracket in retirement, you might do better with a traditional IRA, while if you expect to be in a higher bracket, you might prefer a Roth.
  • If you want more flexibility in retirement distributions, you might opt for a Roth IRA since it is not subject to RMD rules, permitting you to postpone distributions as long as you want.
  • As a general rule, younger investors who are still many years away from retirement may want to choose a Roth account, since your money has a long time to grow tax-free.

Keep in mind that this is just a summary and other rules apply to both types of IRAs. Talk to a financial professional to help you decide which IRA best suits your circumstances.

Traditional vs. Roth at a glance

Individual contribution limit (2022)
Catch-up contribution limit (2022)
Contribution tax treatment
Pretax (deductible)
After tax (nondeductible)
Limits on deductibility/ eligibility
Deductibility based on income, filing status, and
if covered under an employer plan
Eligibility based on income and filing status
Distribution tax treatment
Tax-free, if held >5 years and you are over the age of 59 1/2
Required minimum distributions
Not required, while alive

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