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Comparing Traditional and Roth IRAs

Which is better - Traditional or Roth IRA? What you need to know IRA investments eligibility, deductions, taxation, and required minimum distributions.
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roth ira vs traditional ira

Opening an IRA is a great way to save for retirement. It allows you to make tax-advantaged contributions that may produce more significant gains than investing in an account without similar tax advantages (where are the best Roth IRA rates?).

Most people are eligible to open Traditional and Roth IRAs, and depending on your financial situation, one of the two may be better than the other.

Table of Contents
  1. Comparing Traditional and Roth IRAs
    1. How Traditional IRAs Work
    2. How Roth IRAs Work
  2. Side by Side IRA Comparison Table
  3. Traditional and Roth IRA Features
  4. Traditional IRA Features
    1. Eligibility:
    2. Contributions:
    3. Taxes:
    4. Tax Deduction Rules:
    5. Distributions:
  5. Roth IRA Features
    1. Eligibility:
    2. Contributions:
    3. Taxes:
    4. Distributions:
  6. Which is Better, Traditional or Roth IRA?
    1. Factors to consider: 
    2. Which is better?

Comparing Traditional and Roth IRAs

Both a Traditional IRA and Roth IRA have certain tax advantages that make them good options for your retirement investments. The main difference is that a Traditional IRA is a tax-deferred retirement plan, and a Roth IRA is a tax-exempt retirement plan.

To put this another way, the difference between the two retirement plans is how and when you pay taxes on them.

How Traditional IRAs Work

Traditional IRA contributions are made with pre-tax money, which will grow without taxes until you withdraw in retirement age or under certain circumstances. The tax benefit will be recorded when you file your taxes next year, usually by reducing your taxable income by the contribution amount if you are eligible to contribute to a tax-deductible Traditional IRA based on your income.

Check out the IRA contribution limits to determine if you are eligible for tax-deductible contributions. Withdrawals from Traditional IRAs are taxed at the time of distribution. Traditional IRAs are also subjected to required minimum distributions starting at age 72, regardless of whether or not you feel the need to make withdrawals.

How Roth IRAs Work

Roth IRA contributions are made with money already taxed, and contributions are not tax-deductible when you make them. However, since the contributions were made with already taxed money, qualified distributions can be made tax-free. There are no required minimum distributions for Roth IRAs, which gives you more flexibility in retirement.

Please see the links above for Roth IRA income and contribution limits for more information about Roth IRA eligibility. Early withdrawal rules still apply; however, other tax rules permit withdrawals for events such as buying your first house, paying for college, and others. Please visit the IRS website or contact a tax professional for more details.

Beware of early withdrawal penalties. Making withdrawals before retirement age may subject you to early withdrawal penalties. These penalties can cost you 10% of what you withdraw, and you have to pay taxes on the amount you withdraw immediately. So you can lose a large portion of your retirement fund by making early withdrawals.

Side by Side IRA Comparison Table

FeaturesTraditional IRARoth IRA
Who can contribute?You can contribute if you (or your spouse filing jointly) have taxable compensation but not after age 72 or older.You can contribute at any age if you (or your spouse if filing jointly) have taxable compensation and your modified adjusted gross income is below specific amounts (see IRA Contribution Limits).
Are my contributions deductible?You can deduct your contributions if you qualify.Your contributions aren’t deductible.
How much can I contribute?The most you can contribute to all of your Traditional and Roth IRAs is the smaller of:

– For 2022, $6,000, or $7,000 if you’re age 50 or older by the end of the year or your taxable compensation for the year.

There are income limits for tax deductions for Traditional IRAs and income limits for Roth IRA eligibility. See below for more information.
The most you can contribute to all of your Traditional and Roth IRAs is the smaller of:

– For 2022, $6,000, or $7,000 if you’re age 50 or older by the end of the year or your taxable compensation for the year.

There are income limits for tax deductions for Traditional IRAs and income limits for Roth IRA eligibility. See below for more information.
What is the deadline to make contributions?Your tax return filing deadline (not including extensions). For example, you can make 2021 IRA contributions until April 15, 2022.Your tax return filing deadline (not including extensions). For example, you can make 2021 IRA contributions until April 15, 2022.
When can I withdraw money?You can withdraw money anytime. However, there may be tax implications if you withdraw before age 59 ½.Roth IRA contributions can be withdrawn penalty-free at any time. However, there may be tax implications if you make earnings withdrawals before age 59 ½. See Roth IRA withdrawal rules for more information.
Do I have to take required minimum distributions?You must start taking distributions by April 1, following the year you turn age 72, and by December 31 of later years.Not required if you are the original owner.
Are my withdrawals and distributions taxable?Any deductible contributions and earnings you withdraw or that are distributed from your traditional IRA are taxable. Also, if you are under age 59½, you may have to pay an additional 10% tax for early withdrawals unless you qualify for an exception.None if it’s a qualified distribution (or a withdrawal that is a qualified distribution). Otherwise, part of the distribution or withdrawal may be taxable. If you are under age 59 ½, you may also have to pay an additional 10% tax for early withdrawals unless you qualify for an exception.

Traditional and Roth IRA Features

There are several similarities between traditional and Roth IRAs. But they offer different features and advantages, sometimes making one a better option than the other, depending on individual circumstances.

Traditional IRA Features

Eligibility:

Anyone under age 72 can contribute to a Traditional IRA. However, you must meet specific income requirements to deduct your contributions from your taxes. You can still contribute to a Traditional IRA if you exceed income requirements. However, it would be a nondeductible IRA.

Contributions:

Contributions can only be made from taxable, earned income. This is generally considered salary, wages, tips, bonuses, commissions, and self-employment income. Excluded income includes rents, royalties, investment income, and other non-taxable income.

A note about earned income requirements: military members deployed to a tax-exempt combat zone for an entire year typically do not have any earned income for tax purposes. These members are still eligible to contribute to either a traditional or Roth IRA through provisions in the HERO Act).

Taxes:

Traditional IRA contributions are made from income that has not yet been taxed. This reduces the participant’s taxable income when they file their tax return. This provides an immediate tax advantage since the contributions are made pre-tax. Taxes are deferred and paid when you make withdrawals.

Tax Deduction Rules:

Filing StatusModified AGIDeduction
Single or head of household$68,000 or lessFull deduction up to the amount of your contribution limit
More than $68,000 but less than $78,000Partial deduction
$78,000 or moreNo deduction.
Married filing jointly or qualifying widow(er)$109,000 or lessFull deduction up to the amount of your contribution limit
More than $109,000 but less than $129,000Partial deduction
$129,000 or moreNo deduction
Married filing separatelyLess than $10,000Partial deduction
$10,000 or moreNo deduction
If you file separately and did not live with your spouse at any time during the year, your IRA deduction is determined under the "Single" filing status.

Distributions:

You can begin taking penalty-free withdrawals at age 59½. Withdrawals made before that age may require the participant to pay both taxes on the withdrawals and early withdrawal penalties of up to 10%. Speaking with a tax professional or the IRS for further guidance is a good idea. There are also Required Minimum Distributions (RMDs), starting at 72.

The IRS requires members to begin taking withdrawals at that age to ensure they get a piece of the taxes that haven’t yet been paid on the investments. It’s a good idea to meet with a tax professional before you begin your RMDs to ensure you are taking a sufficient amount of withdrawals. Otherwise, you might subject yourself to additional penalties.

Roth IRA Features

Eligibility:

Taxpayers must meet Roth IRA income eligibility requirements to be eligible to contribute to a Roth IRA. The Roth IRA income limits change yearly based on your tax-filing status.

Filing StatusModified AGI Allowable Contribution
Married filing jointly or qualifying widow(er)$204,000 or lessUp to the annual contribution limit
more than $208,000 but less than $214,000Partial amount
$215,000 or moreNo contribution
Married filing separately and you lived with your spouse at any time during the yearless than $10,000Reduced amount
$10,000 or moreNo contribution
Single, head of household or married filing separately and you did not live with your spouse at any time during the year$129,000 or lessNo contribution
more than $129,000 but less than $144,000Partial contribution
$144,000 or moreNo contribution

Contributions:

Annual IRA contribution limits are the same for both Roth and Traditional IRAs. Like the Traditional IRA, Roth IRA contributions must be made from earned income.

Taxes:

The main difference between Roth and Traditional IRAs is how and when the funds are taxed. Roth IRA contributions are made from the money you have already paid taxes on (post-tax income). The investments will then grow without you having to pay further taxes. You will also not have to pay taxes on the distributions when you make withdrawals. This gives participants much more flexibility regarding how and when they take funds from their Roth IRA.

Distributions:

Unlike the Traditional IRA, there are no Required Minimum Distributions to worry about. Members can leave their money in their Roth IRA until needed without worrying about taking minimum withdrawals. Members can access contributions to their Roth IRA at any time. However, they cannot access the earnings from their contributions until the account has been open for at least five years and the member has reached the age of 59½. Taking withdrawals earlier than that may subject the individual to early withdrawal penalties.

Which is Better, Traditional or Roth IRA?

roth ira vs traditional ira

There is no one-size-fits-all approach to this question. The answer will entirely depend upon your unique circumstances. Both types of IRAs can offer you the opportunity for tax diversification and more flexibility in retirement.

Factors to consider: 

Many factors to consider when comparing Roth and Traditional IRAs, including your current and expected tax bracket in retirement. You must also consider current income, expected future income, Roth or Traditional IRA income eligibility, contribution limits, and Required Minimum Distribution requirements.

Tax-free Traditional IRA contributions phase out at lower income levels than Roth IRAs. So you may consider a Roth if you cannot receive the tax deductions from a Traditional IRA. There are also minimum withdrawal requirements for Traditional IRAs, while Roth IRAs do not have a required minimum distribution.

Which is better?

Many financial experts recommend you start investing with a Roth IRA if you are eligible because they offer tax-free withdrawals and other benefits such as higher income levels for eligibility and no required minimum distributions. Overall, they provide more flexibility than Traditional IRAs. That said, there are times when a Traditional IRA is a right choice.

We have these two articles which further compare the pros and cons of Roth and Traditional IRAs:

Take some time to consider your situation before deciding which IRA to open. The long-term benefits are worth getting it right the first time! Here is more information about what to look for when opening an IRA.

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About Ryan Guina

Ryan Guina is The Military Wallet's founder. He is a writer, small business owner, and entrepreneur. He served over six years on active duty in the USAF and is a current member of the Illinois Air National Guard.

Ryan started The Military Wallet in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about personal finance and investing at Cash Money Life.

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  1. Credit Card Chaser says

    The choice really all boils down to whether you think that you tax rate will be higher now or higher when you retire.

  2. Britt (Your Roth IRA) says

    While every financial circumstance is different, I think most people would benefit more from a Roth IRA. Why? Well, the odds are pretty good that tax rates will be higher in the future than they are now, given the massive size of the national debt. So the idea that rates might go down when you retire is wishful thinking at best. Also, if you’re already thinking about retirement, the odds are good that you won’t need your Roth IRA funds immediately once you retire, nor will they be your sole source of income. So do you want to box yourself in to mandatory withdrawals at age 70.5? Especially is you live to be 100 or older?

    I just don’t see how you can go wrong with the tax-free withdrawals of a Roth IRA.

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