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.

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 no later than age 70-1/2. 

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. 

You may contribute up to $6,000 to either a Roth or traditional IRA for 2019 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 #

Traditional
Roth
Individual contribution limit (2019)
$6,000
$6,000
Catch-up contribution limit (2019)
$1,000
$1,000
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
Taxable
Tax-free, if held >5 years and you are over the age of 59 1/2
Required minimum distributions
Required
Not required, while alive

Please refer to our Terms & Disclosures

 

Brokerage and investment advisory services offered by UnionBanc Investment Services LLC, an SEC-registered broker-dealer, investment adviser, member FINRA / SIPC, and subsidiary of MUFG Union Bank, N.A. Insurance services offered by UnionBanc Insurance Services, a division of MUFG Union Bank, N.A., having a California domicile and principal place of business at 1201 Camino Del Mar, Suite 208, Del Mar, CA 92014. California State Insurance License No. 0817733. Non-deposit investment and insurance products: • Are NOT deposits or other obligations of, or guaranteed by, the Bank or any Bank affiliate • Are NOT insured by the FDIC or by any other federal government agency • Are subject to investment risks, including possible loss of the principal amount invested • Insurance and annuities are products of the insurance carriers.

 

Clients requiring banking services will work directly with bankers from MUFG Union Bank, N.A. Bank products available through MUFG Union Bank, N.A. are FDIC-insured within permissible limits.

You’re leaving Union Bank

By clicking on the link below, you will leave the Union Bank website and enter a privately owned website created, operated, and maintained by another unaffiliated business. By linking to the website of this private business, Union Bank is not endorsing its products, services, or privacy or security policies. If you accept third-party goods or services advertised at our website, the third party may be able to identify that you have a relationship with us (for example, if the offer was made only through our site).

The information that this private business collects and maintains as a result of your visit to its Web site, and the manner in which it does so, may differ from the information that Union Bank collects and maintains. (Refer to the Privacy & Security section for privacy protections Union Bank provides to its Web site visitors). If you provide the business with information, its use of that inforation will be subject to that business's privacy policy. We recommend you review their information collection policy, or terms and conditions to fully understand what that business collects. We are not responsible for the information collection practices of the other Web sites that you visit and urge you to review their privacy policies before you provide them with any personally identifiable information.

If you wish to continue to the destination link, press Continue.