Traditional IRA vs. Roth IRA: Which One is Right for You?
- mackenziestussie
- Mar 18
- 3 min read
When it comes to retirement planning, Individual Retirement Accounts (IRAs) are a powerful tool to build long-term wealth. However, choosing between a Traditional IRA and a Roth IRA can be challenging. Each has distinct tax advantages and rules that make one more suitable than the other depending on your financial situation. Here’s what you need to know to make an informed decision.
Key Differences Between Traditional and Roth IRAs
1. Tax Treatment: Pay Taxes Now or Later?
Traditional IRA: Contributions are made with pre-tax dollars, meaning you may receive an immediate tax deduction. However, withdrawals in retirement are taxed as ordinary income.
Roth IRA: Contributions are made with after-tax dollars, so there is no tax deduction now, but withdrawals in retirement—including earnings—are tax-free, as long as certain conditions are met.
2. Income Limits and Eligibility
Roth IRA Income Limits: Not everyone is eligible to contribute directly to a Roth IRA due to income restrictions. For 2024, contributions phase out at the following Modified Adjusted Gross Income (MAGI) levels:
Single Filers: $146,000–$161,000
Married Filing Jointly: $230,000–$240,000
If your income exceeds these limits, direct Roth IRA contributions are not allowed, but a backdoor strategy (explained below) can be an option.
Traditional IRA Income Considerations: Anyone can contribute to a Traditional IRA, but deductibility depends on whether you or your spouse are covered by an employer-sponsored retirement plan. If covered, deductions phase out at:
Single Filers: $77,000–$87,000
Married Filing Jointly: $123,000–$143,000
3. Required Minimum Distributions (RMDs)
Traditional IRA: You must start taking required minimum distributions (RMDs) at age 73, regardless of whether you need the funds. These withdrawals are subject to income tax.
Roth IRA: No RMDs are required during the original account holder’s lifetime, making it an attractive option for estate planning.
4. Withdrawal Rules
Traditional IRA: Withdrawals before age 59½ may incur a 10% early withdrawal penalty, unless an exception applies.
Roth IRA: Contributions (but not earnings) can be withdrawn tax- and penalty-free at any time. Earnings can also be withdrawn tax-free after age 59½, provided the account has been open for at least five years.
The Backdoor Roth IRA Strategy
If your income exceeds the Roth IRA contribution limits, you can still benefit from tax-free withdrawals in retirement by using a strategy known as the Backdoor Roth IRA. This involves:
Contributing to a Traditional IRA (which has no income limits for contributions but may not be tax-deductible).
Converting the funds to a Roth IRA soon after the contribution.
Paying taxes on any pre-tax contributions and earnings at the time of conversion.
This strategy allows high-income earners to take advantage of a Roth IRA’s tax-free growth and withdrawal benefits.
Which One is Right for You?
Choose a Traditional IRA if: You want immediate tax savings and expect to be in a lower tax bracket in retirement.
Choose a Roth IRA if: You prefer tax-free withdrawals in the future and anticipate being in a higher tax bracket later in life.
Use the Backdoor Roth IRA if: You exceed the income limits for direct Roth contributions but still want access to tax-free growth and withdrawals.
