When planning for retirement, choosing between a Roth vs. Traditional IRA is one of the most important decisions you can make. Both offer tax advantages and long-term growth potential, but differ significantly in how and when you receive those benefits.
In this guide, we’ll help you understand the key differences, benefits, and drawbacks of each IRA so you can make a smart, tax-efficient choice for your financial future.
What Is an IRA?
An Individual Retirement Account (IRA) is a powerful tool that allows you to grow your retirement savings with tax advantages. There are two main types:
- Traditional IRA: Contributions may be tax-deductible, but taxes are due when you withdraw in retirement.
- Roth IRA: You pay taxes on contributions now, but withdrawals during retirement are tax-free.
Key Differences Between Roth and Traditional IRAs
Here’s a side-by-side comparison to help you see how they stack up:
When Is a Traditional IRA Better?
You may benefit more from a Traditional IRA if:
- You want an immediate tax deduction to lower your taxable income.
- You’re in a high tax bracket now but expect to be in a lower tax bracket during retirement.
- You’re not eligible to contribute to a Roth IRA due to income limits.
Traditional IRAs are ideal for high earners looking to reduce their current tax bill.
When is a Roth IRA Better?
A Roth IRA might be your best bet if:
- You expect to be in a higher tax bracket in retirement.
- You value tax-free withdrawals and more flexibility.
- You want to avoid RMDs later in life.
- You’re early in your career and have a lower tax bracket now.
Roth IRAs are especially popular with younger investors who want to take advantage of decades of tax-free growth.
Can You Contribute to Both Roth and Traditional IRAs?
Yes, you can contribute to both a Roth and a Traditional IRA in the same year, as long as your total contributions don’t exceed the annual limit:
- 2024 contribution limit: $7,000 (or $8,000 if age 50 or older)
This dual strategy can provide tax diversification and flexibility during retirement.
Choosing the Right IRA: Questions to Ask Yourself
To make the right choice, consider the following:
- Do you need a tax break today or later?
- What tax bracket are you in now, and what do you expect it to be in retirement?
- Do you want to avoid RMDs?
- Are you eligible to contribute to a Roth IRA?
Final Thoughts: Roth vs. Traditional IRA
Both Roth and Traditional IRAs are excellent vehicles for building a secure retirement, but your income, tax situation, and long-term goals will determine which is the better fit.
Quick tip:
- Choose a Roth IRA if you’re early in your career or expect taxes to rise.
- Choose a Traditional IRA if you’re a high earner today but expect to have a lower income in retirement.
Still not sure which one’s right for you? Contact Canter Wealth to speak with a financial advisor and build a custom retirement plan that aligns with your goals.
