An IRA is one of the most prominent forms of retirement savings accounts. You must pick between two options when you start one: Roth or traditional.
How to Choose Between Roth IRAs and Traditional IRAs
The primary distinction between a Roth IRA and a standard IRA is how and when you receive a tax advantage. Traditional IRA contributions are tax-deductible, but withdrawals in retirement are not. On the other hand, contributions to Roth IRAs are not tax-deductible, but withdrawals in retirement are tax-free.
The following are the primary distinctions between standard and Roth IRAs:
| ROTH IRA | TRADITIONAL IRA |
|---|---|
| Key differences | |
| No immediate tax benefit for contributing.Contributions can be withdrawn at any time without taxes or penalties.Ability to contribute is phased out at higher incomes.Qualified withdrawals in retirement are tax-free. | If deductible, contributions reduce taxable income in the year they are made.Deductions can be phased out depending on income.Distributions in retirement are taxed as ordinary income.At age 72, there are required minimum distributions (RMDs). |
| Contribution limit |
| $6,000 in 2020 and 2021 ($7,000 if age 50 or older) |
| Early withdrawal rules |
| Unless you meet an exception, early withdrawals of earnings may be subject to a 10% penalty and income taxes. (Roths allow contributions to be withdrawn at any time). |
Most Roth IRA vs. regular IRA advice begins with a question: Do you believe your tax rate will be higher or lower in the future?
If you can firmly answer that question, you may theoretically choose the form of IRA that will provide you with the greatest tax savings: Choose a Roth IRA and its delayed tax benefit if you expect to be in a higher tax rate in retirement. Suppose you anticipate reduced rates of return in retirement. In that case, a regular IRA with its upfront tax advantage is the way to go.
