Learn the Main Differences Between a Roth IRA and a Traditional IRA

It’s difficult to predict what your tax rate will be in retirement, especially if you’re decades away from retiring. Fortunately, there are other factors to consider when deciding whether a Roth or regular IRA is right for you.

 

First and Foremost: Check Your IRA Eligibility

The IRS limits on IRA eligibility may force you to choose between Roth and standard IRAs. Your earnings will determine:

  • If you are eligible to make a Roth contribution.
  • How much of your conventional IRA contribution you can deduct from your taxes this year. Deductibility of traditional IRAs is limited only if you or your spouse have access to an employee savings plan, such as a 401(k) (k).

It’s worth noting that you can contribute to both a regular and a Roth IRA in the same year, as long as the total amount does not exceed the maximum permissible contribution limit, which is $6,000 in 2021 and 2022 ($7,000 if you’re 50 or older).

Why the Roth IRA Works for Most Savers

Here are several reasons why a Roth IRA may be preferable to a standard IRA for individuals who qualify.

  1. With a Roth, early withdrawal requirements are significantly more flexible. Although early withdrawals from retirement accounts are typically discouraged, the Roth permits you to withdraw contributions — money you put into the account, not earnings — at any time without having to pay income taxes or an early withdrawal penalty.

Suppose you withdraw from a regular IRA before retirement. In that case, the IRS isn’t as forgiving: You’ll almost certainly be hit with a hefty 10% early withdrawal penalty, as well as taxes at your current income tax rate on the money you withdraw. There are a few exceptions to this rule — for more information, visit our page on traditional IRA withdrawal requirements — but you’ll need to approach with considerably more caution than you would with a Roth.

 
  1. For retirees, the Roth has fewer restrictions. Traditional IRAs require you to begin taking required minimum distributions (RMDs) when you reach the age of 72.

The Roth IRA has no mandated minimum distribution rules unless you inherit it: You are free to leave your money in the account to grow tax-free for as long as you live.

  1. Unless you’re an exceptionally disciplined saver, a Roth IRA will provide you with more after-tax money. Yes, both kinds of IRAs offer a tax reduction. However, there is an often-overlooked advantage to the Roth’s tax treatment. Because your tax break won’t arrive until retirement (via tax-free withdrawals), you won’t be tempted to spend it before then. The tax benefit from a typical IRA is provided annually when you file your taxes, making it easy to squander the money on a variety of items.