Traditional IRA vs Roth IRA

Individual Retirement Accounts (IRAs) are investment accounts that provide tax benefits to help individuals save for retirement. There are two main types of IRAs: Traditional IRAs and Roth IRAs. (You can learn about other types of IRAs here). While both Traditional and Roth IRAs offer significant tax benefits, there are some key differences between the two.

A Traditional IRA allows you to contribute pre-tax dollars, which means that you may be able to deduct your contributions (depending on your income and household employer retirement plan coverage) from your taxable income in the year that you make them. The money in your Traditional IRA account grows tax-deferred, which means you don't have to pay taxes on the earnings until you withdraw the money. However, when you withdraw the money in retirement, you'll have to pay taxes on both your contributions and the earnings at your ordinary income tax rate at the time of withdrawal. If you withdraw assets before the age of 59.5, you will pay a 10% penalty in addition to ordinary income taxes.

A Roth IRA, on the other hand, allows you to contribute post-tax dollars, which means you won't get an immediate tax deduction for your contributions. However, the money in your Roth IRA account grows tax-free, which means you don't have to pay taxes on the earnings, even when you withdraw the money in retirement.

Here are some of the key benefits and differences of a Roth IRA and Traditional IRA:

Benefits of a Traditional IRA:
  • Contributions can be tax-deductible
  • Earnings grow tax-deferred
Benefits of a Roth IRA:
  • Earnings grow tax-free
  • Contributions can be withdrawn tax-free
  • Qualified withdrawals are tax-free
  • No required minimum distributions (RMDs) during your lifetime
  • Can be a good option if you are young or expect to be in a higher tax bracket in retirement
Key differences between Traditional and Roth IRA:
  • Traditional IRA contributions may be tax-deductible while Roth IRA contributions are not
  • Traditional IRA earnings are taxed as ordinary income when withdrawn in retirement while Roth IRA earnings are tax-free when withdrawn in retirement

  • Traditional IRAs have required minimum distributions (RMDs) starting at age 731, while Roth IRAs have no RMDs
  • Traditional IRAs may be a better option if you expect to be in a lower tax bracket in retirement, while Roth IRAs may be a better option if you expect to be in a higher tax bracket in retirement
  • Roth IRAs may be a better option if you live in an income tax free state and expect to move to a state in retirement that taxes RMDs.

In summary, both Traditional and Roth IRAs can be valuable tools to help individuals save for retirement. The choice between the two depends on your individual circumstances, including your current and expected future tax bracket, state tax location, and current household income level.

The One Day In July office in Wayne, PA provides investment management services as fee-only fiduciary financial advisors to the greater Philadelphia area, the Main Line, and surrounding communities including Villanova, Radnor, St. Davids, Wayne, Strafford, Chesterbrook, Devon, Berwyn, Paoli, Malvern, King of Prussia, Valley Forge, Havertown, and more.

If you need assistance in determining what retirement account is right for you, please contact us today to set up a free consultation. We can meet in person if you're in the area or set up a phone call or Zoom meeting if you prefer.

1. RMD increases to 75 in 2033.

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