When it comes to saving for retirement, individual retirement accounts (IRAs) are a popular choice. However, there are different types of IRAs to choose from, and it’s important to understand the differences between them before making a decision. In this article, we’ll compare the ins and outs of a Roth IRA and a traditional (normal) IRA.
What is an IRA?
An IRA is a type of investment account that allows you to save for retirement. You can contribute up to a certain amount each year, and the money in the account grows tax-free until you withdraw it in retirement. There are two main types of IRAs: Roth IRAs and traditional IRAs.
Roth IRA
A Roth IRA is an individual retirement account that allows you to contribute after-tax dollars, meaning you pay taxes on the money you contribute upfront. The money in the account grows tax-free, and you won’t pay taxes on the earnings when you withdraw them in retirement. Roth IRAs have a few key features:
- No age limit for contributions: You can contribute to a Roth IRA at any age, as long as you have earned income.
- No required minimum distributions (RMDs): With a Roth IRA, you’re not required to take distributions at any age, which means you can let the money continue to grow tax-free for as long as you like.
- Income limits for contributions: If you earn too much money, you may not be eligible to contribute to a Roth IRA. For 2023, the income limits are $140,000 for single filers and $208,000 for married filing jointly.
Traditional IRA
A traditional IRA is an individual retirement account that allows you to contribute pre-tax dollars, meaning you’ll pay taxes on the money you withdraw in retirement. The money in the account grows tax-free until you withdraw it in retirement. Traditional IRAs have a few key features:
- Age limit for contributions: You can contribute to a traditional IRA until age 72. If you’re older than 72, you’re not eligible to contribute, but you can still make withdrawals.
- Required minimum distributions (RMDs): With a traditional IRA, you’re required to start taking distributions at age 72, whether or not you need the money.
- Income limits for tax deduction: If you earn too much money, you may not be eligible to deduct your traditional IRA contributions on your taxes. For 2023, the income limits are $86,000 for single filers and $129,000 for married filing jointly.
Comparison
Here are some of the key differences between Roth IRAs and traditional IRAs:
- Taxes: Roth IRAs are funded with after-tax dollars, while traditional IRAs are funded with pre-tax dollars. This means that with a Roth IRA, you pay taxes upfront, while with a traditional IRA, you pay taxes when you withdraw the money in retirement.
- Income limits: Roth IRAs have income limits for contributions, while traditional IRAs have income limits for tax deductions.
- Required minimum distributions: Roth IRAs don’t have required minimum distributions, while traditional IRAs require you to start taking distributions at age 72.
Which is better for you?
The answer to this question depends on your individual circumstances. Here are some factors to consider:
- Current tax bracket: If you’re in a high tax bracket now, a traditional IRA may be a better choice, since you’ll be able to deduct your contributions and reduce your tax bill. If you’re in a low tax bracket now, a Roth IRA may be a better choice, since you’ll pay taxes now at a lower rate than you would in retirement.
- Future tax bracket: If you expect your tax bracket to be higher in retirement than it is now
https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras