Roth IRA vs. Traditional IRA: Key Differences and the Best Choice for You

If you’re exploring options for retirement funds, you may have heard the term IRA countless times without actually knowing what it means. Lucky for you, we’re here to help you understand what an individual retirement account (IRA) is and whether or not you should place your money into a Roth IRA account or a Traditional IRA. 

If you qualify for one of these accounts, you can choose between a Traditional IRA or a Roth IRA. While both have similar end goals and advantages, the two accounts have some key differences.  

Traditional IRA

• Money is contributed pre-tax, which reduces your taxable income while you set aside money for retirement. 

• Taxes will be due when you withdraw your money from the account.

• Lowers your taxable income and may allow for tax benefits you would not otherwise qualify for. 

• Income restrictions apply and are based on where one can contribute. In 2023, single filers who participate in their employers’ retirement programs must have a MAGI of less than $83,000, and contributions phase out starting at $73,000. Married couples who file jointly and participate in an employer's retirement plan must have modified AGIs of less than $136,000 to contribute, and contributions phase out starting at $116,000. Married couples who file jointly where the spouse participates in an employer's retirement plan must have modified AGIs of less than $228,000 to contribute, and contributions phase out starting at $218,000.

• In return for tax benefits, you have restricted access to your funds. If you withdraw money from a Traditional IRA before age 59.5, you’ll pay taxes and a 10% early withdrawal penalty. You may avoid this penalty in some circumstances, like home buying and qualified higher education expenses.

Roth IRA

• Money is contributed post-tax.

• There are no immediate tax savings, but you will not be taxed when you withdraw money after retirement. 

• Functions like a regular investment account, with fewer restrictions than a Traditional IRA, but fewer breaks. 

• Comes with income eligibility restrictions. In 2023, single filers must have a MAGI of less than $153,000, with contributions phasing out starting with a MAGI of $138,000. Married couples must have modified AGIs of less than $228,000 to contribute to a Roth, and contributions phase out starting at $218,000.

• There are no required minimum distributions, making it ideal for wealth transfer. Beneficiaries of Roth IRAs also won’t owe income tax on withdrawals, though they must take distributions or roll the account into their own IRA. 

• There is no penalty on withdrawals before age 59.5 if you’ve been contributing to the account for five years. 

In Conclusion:

Both accounts provide excellent tax breaks, but the timing differs on when you can claim them. 

Both also allow for withdrawals before retirement age, though only the Roth account allows for them without penalty after five years of contributions.  

Only the Traditional IRA requires a minimum withdrawal at the age of 72, regardless of whether or not you need the money at that time. 

If you are seeking advice on the tax advantages of your IRA, reach out to us today!