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Traditional IRA vs. Roth IRA: A comprehensive guide for savers
IRA Savers

Traditional IRA vs. Roth IRA: A comprehensive guide for savers

Guideline Team

💡 Key takeaways:

  • Traditional and Roth IRAs are tax-advantaged accounts that can help you save for retirement.
  • Saving with a Traditional IRA typically gives you a tax benefit in the present, and a Roth IRA can help you save on taxes later in retirement.
  • You can have both a Roth and a Traditional IRA if you meet the eligibility requirements.

An individual retirement account, commonly known as an IRA, is a tax-advantaged investment account that can help you save for retirement. Whether you're just starting your career or getting close to retirement, an IRA can help you build a solid financial foundation for the future.  

There are two types of IRAs: Traditional and Roth. In this post, we'll explain the differences between the two and what you should consider when deciding which is right for your goals.

Traditional IRA

A Traditional IRA is a tax-friendly account for your retirement funds. The money you contribute to a Traditional IRA is generally pre-tax, which means you’ll pay taxes as you withdraw it in retirement. (Note, there are a few exceptions to consider.) Because the contributions you make to a Traditional IRA are pre-tax, you may potentially lower your taxable income as you save for retirement.

How much can you save with a Traditional IRA?

In 2024, you can contribute $7,000 to a Traditional IRA, or $8,000 with catch-up contributions if you are over 50. IRS rules say you can’t contribute more money than you earn, but you can use your spouse’s income towards your contribution if you file a joint tax return. Note that this limit is offset by any amount you contribute to a Roth IRA.

Benefits of saving with a Traditional IRA

There are many benefits to saving with a Traditional IRA. For example, when you contribute to a Traditional IRA with pre-tax dollars, you may reduce your taxable income in the year the contributions are made, providing an immediate tax benefit.

Also, with tax-deferred growth, the interest your account earns won’t be taxed until you withdraw it in retirement. This means your savings can grow over time without paying taxes each year. Plus, you may be in a lower tax bracket during retirement, potentially leading to even more tax savings.

Traditional IRA withdrawal rules, penalties, and flexibility

While you can take your money out of an IRA at any time, your circumstances at the time of withdrawal will determine if you will owe any penalties.

While you can take money out of your IRA at any time, withdrawals taken before age 59½ will have a 10% early withdrawal penalty. However, you may be able to avoid the 10% tax if you qualify for an exception under IRS guidelines, such as using withdrawal money for a first-time home purchase, higher education expenses, or qualifying medical expenses.

Traditional IRAs also have required minimum distributions (RMDs) once you reach a certain age, meaning you must withdraw a certain amount every year. While this requirement may limit your savings flexibility, you can still benefit long-term from the account’s tax-deferred growth and potential for lower taxes in retirement.

Roth IRAs

Roth IRAs work a bit differently. Contributions you make to a Roth IRA are taxed as you save, which means your savings — including your investment return— can be taken out tax-free when you meet specific requirements.

How much can you save with a Roth IRA?

You can contribute up to $7,000 to a Roth IRA in 2024, or $8,000 if you qualify for catch-up contributions. However, there are income limits, which may affect how much you’re able to save for retirement in a given year. It's important to check the current IRS guidelines or consult a financial advisor for the most accurate information based on your situation. Note that this limit is offset by any amount you contribute to a Traditional IRA.

Benefits of saving with a Roth IRA

Saving for retirement with a Roth IRA offers a unique set of benefits. Unlike Traditional IRAs, Roth IRAs don't require you to withdraw a certain amount each year once you reach a certain age. This gives you more control over your savings in retirement.

It’s also important to note that Roth IRAs can be helpful when it comes to estate planning. With a Roth IRA, your loved ones can inherit your savings and the account can keep growing tax-free, until they withdraw it.

Roth IRA withdrawal rules, penalties, and flexibility

When it comes to withdrawals, Roth IRAs provide a lot of flexibility. You won't pay taxes on withdrawals made from a Roth IRA that consist of your annual contributions regardless of when you take it out. You also will not pay taxes on the earnings as long as you’re at least age 59 ½, disabled, or are a first time home buyer (limited to $10,000 over your lifetime) and it has been at least five years since you first made a Roth IRA contribution to any account. However, if you want to withdraw money sooner, you could face taxes on your earnings and a 10% penalty unless an exception applies.

It's worth mentioning that the five-year rule isn't based on one specific Roth IRA, so the clock starts once you’ve contributed to any Roth IRA.

Traditional IRA vs Roth IRA: Understanding the differences

There are some differences between Traditional and Roth IRAs, with the most significant difference being when you'll receive tax benefits. To recap:

Traditional IRA

  • Contributions are generally pre-tax
  • Investment growth is tax-deferred
  • Taxes paid at time of withdrawal

Roth IRA

  • Contributions are post-tax
  • Investments grow tax-deferred and potentially tax-free
  • Qualified withdrawals are tax-free

Can I have both a Traditional and a Roth IRA?

Yes! So long as you meet the eligibility requirements for each, you can save for retirement with both a Traditional and Roth IRA.

A key consideration here is how much you can contribute. The total annual contribution limit applies to both Traditional and Roth IRAs. Meaning, you can save up to $7,000 in 2024 across any and all Traditional and Roth IRA accounts you may have — not $7,000 in each.

Which IRA is right for you?

At the end of the day, the Traditional vs. Roth IRA decision boils down to tax preferences. Generally speaking, Roth IRAs can be a great option if you think you'll be in a higher tax bracket during retirement than you are today or are more interested in the estate planning aspect of the IRA. On the other hand, Traditional IRAs may be suitable if you expect to be in the same or a lower tax bracket when you retire.

That said, saving for retirement is personal. There are many factors to consider when building a successful savings strategy, including your income, expenses, where you plan to retire and how you see yourself spending your time. We recommend consulting a professional that can help you build a roadmap for your financial future.

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This information is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances. You are advised to consult a qualified financial adviser or tax professional before relying on the information provided.