Roth vs. Traditional IRA: Which One Works Best for Your Retirement Goals?

Key Points

• A traditional IRA provides up-front tax breaks that make investing easier.

• A Roth IRA offers tax savings in retirement and can help you avoid taxes on Social Security.

• The right account for you will depend on your current and likely future tax rates.

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Traditional and Roth IRAs are both tax-advantaged accounts that you can use to save for retirement. While you are typically allowed to contribute to both each year (depending on income), there is a combined limit for the two accounts, meaning many people choose one or the other.

So, which one should you choose when you are making your retirement plans? Here's how you can decide between these two accounts.

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Key differences between a traditional and Roth IRA

As you decide between a traditional and a Roth IRA, you need to understand the key differences between the two accounts. Specifically:

• A traditional IRA comes with up-front tax breaks. You can deduct the amount you contribute to the retirement plan in the year that you make your contribution. This is the same rule that applies to a traditional 401(k).
• A Roth IRA does not offer up-front tax breaks. You can take withdrawals from this account without paying taxes on withdrawals (as long as you meet all the account requirements). But you cannot claim a deduction for the amount you contributed in the year that you invest.
• Traditional IRAs have required minimum distributions (RMDs), but Roth IRAs do not. RMDs start the year you turn 73. Once you hit the milestone age, you must make withdrawals based on a schedule the government sets. You can withdraw more than required, but not less or you'll be hit with a hefty tax penalty. Roth IRAs don't require RMDs, so you have more control over your withdrawal schedule.
• Roth IRA distributions don't count when calculating the income that determines if Social Security is taxed. Your Social Security benefits become partly taxable once your provisional income hits $25,000 for single tax filers or $32,000 for married people filing jointly. Provisional income is half your Social Security, all taxable income, and some nontaxable income. Roth IRA distributions aren't taxable income, so they won't count in determining if your benefits are taxed and by how much.

These are just a few key differences between traditional and Roth IRAs that are worth considering during your retirement planning process.

Which account is right for you?

Understanding these differences can help you choose the right account for you.

For most people, the difference in the tax treatment is the biggest deciding factor. If you expect that you will be in a lower tax bracket as a retiree than you currently are, then you are better off claiming your tax savings now. So a traditional IRA would be better for you. This can make sense if you expect your income to go down in retirement or think that taxes on the whole will be lower at that time.

On the flip side, if you expect that you will be in a higher tax bracket, or if you are worried about ending up with your Social Security income being taxed, then a Roth IRA is the ideal account for your situation. A Roth is also better if you don't want to have to take RMDs because you would prefer to preserve your nest egg for as long as possible or for future generations.

Ultimately, investing in either a traditional or a Roth IRA can be a good way to help you build a more secure future, so make sure you meet income limits, explore both options, pick the one that makes more sense, and get started investing today.

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