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.
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 (2022) | $6,000 | $6,000 |
| Catch-up contribution limit (2022) | $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. 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
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.