Traditional IRA vs. Roth IRA: Which One’s Right for You?

Traditional IRA vs. Roth IRA: Which One's Right for You? Individual Retirement Arrangements (IRAs) are a great way for earners to invest their retirement savings outside of a workplace sponsored retirement plan like a 401(k). Individuals can choose between opening and contributing to a Traditional or Roth IRA, however each offers different tax considerations that benefit some investors more than others.

At Correct Capital Wealth Management, we help people achieve their life goals by creating a financial roadmap that gets them from where they are to where they want to go. If you're thinking about opening up an IRA, or if an IRA may be a good option for a 401(k) rollover, speak to a team member at 877-930-4015, contact us online, or schedule a consultation with one of our financial advisors today.

Not sure if you're ready to work with a financial advisor? Check out our process to see how easy it is to find out if we're a good fit.

What Are IRAs?

IRAs are long-term, tax-advantaged retirement accounts wherein earners can invest their savings, with the idea that those investments will help their savings grow over time. In exchange for responsibly saving for retirement, the IRS offers tax advantages to workers who contribute to an IRA. Workers who want to contribute to an IRA outside of their workplace retirement plan have two options available to them: a Traditional IRA or a Roth IRA. While there are key differences in how the two types of accounts are taxed, there are several similarities:

  • Anyone with earned income can open and contribute to an IRA
  • IRAs offer a wide range of investments, including stocks, bonds, ETFs, and mutual funds
  • Maximum contribution limits are the same (up to $7,000 in 2024, or $8,000 if you are over the age of 50)

The main difference between Traditional and Roth IRAs are when contributions are taxed. Uncle Sam is always going to get a slice of what you've earned at some point, but depending on your current life situation and where you expect to be in the future, it might be more suitable for you to take those taxes out later (Traditional IRA) or now (Roth IRA).

Traditional IRAs

A Traditional IRA is a tax-deferred retirement savings account that allows your investments to grow until you're ready to withdraw them in retirement. Contributions are typically tax-deductible and made with pre-tax dollars, potentially lowering your taxable income in any given year by the amount you contribute. The earnings grow tax deferred, which means your taxes on the contributions and investment earnings aren't due until you withdraw the money, and taxes will be based on your income at the time of withdrawal. You may be assessed an additional 10% early withdrawal penalty if you withdraw from the account before age 59-Ā½. Required minimum distributions (RMDs) don't start until you turn 73.

Roth IRAs

In contrast, contributions to a Roth IRA must be made with after-tax dollars. The benefit of a Roth IRA is that it offers tax-free growth and tax-free withdrawals in retirement as you've already paid taxes on the money you contributed. This is particularly appealing for long-term growth, as the more your investment earns, the more you stand to benefit from tax-free withdrawals. Roth IRAs do not have RMDs until the owner of the account passes away, and contributions (but not earnings) can be withdrawn at any time without penalty.

There are also income limits to being able to contribute to a Roth IRA. In 2024, single tax filers must have an adjusted gross income of less than $161,000, while if married or filing jointly it must be less than $240,000. Contributions and earnings can be withdrawn penalty-free, as long as you have had the account for 5 years and are at least 59 1/2 years old.

So, Is a Traditional or Roth IRA Right for Me?

The answer depends on your unique financial situation and goals, but typically, people who expect to earn more in the future than they are now would get more tax advantages from a Roth IRA, while those who are currently high earners (and thus, expect their income to be less in retirement) would benefit more from a Traditional IRA. Often, this correlates to Traditional IRAs being more suitable to people nearing retirement or on the back 9 of their careers, while Roth IRAs are more suitable to workers in their 30s and 40s who still have several decades left in the workforce.

For a practical example, let's consider two people at different points of their careers, and whether they might be best suited for a Traditional or Roth IRA.

The High Earner

James is approaching his 60th birthday, and is a C-level executive at a major firm. He has been dutifully making catch-up contributions to his retirement accounts, and he and his spouse are in the 22% tax bracket. In retirement, with Social Security benefits and distributions from his 401(k) and IRA, he expects to be in the 12% income bracket in retirement.

Traditional deferrals would likely be better suited for James. If we assume he contributes up to the maximum of $8,000, it's in James's best interest to forego paying income taxes on those contributions at his current rate of 22%, and instead pay the taxes on both the contribution and earning when he withdraws the money at his retirement rate of 12%. By making Traditional deferrals, James is also able to reduce his taxable income for the current year by $8,000, offering a tax benefit that's advantageous both short and long term.

The Rising Star

Grace, on the other hand, is a recent graduate and driven entry-level employee at the same firm. She expects to one day be in James's financial position, but as a younger earner with plenty of career left, she's currently in the 12% tax bracket. It would likely make more sense for her to make Roth deferrals. Even though she won't get any tax benefit this year, her investments will be set up for decades of tax-free growth, and she'll avoid paying taxes at the higher rate she expects to be at when she makes the withdrawals.

In short, Traditional IRAs are often better for people who expect to be in a lower income bracket in retirement than they are now, while Roth IRAs are often best suited to people who expect to earn more later than they do now.

Call Our Financial Advisors Today | Correct Capital Wealth Management

The debate between Traditional IRAs and Roth IRAs is not a one-size-fits-all answer. The best way to know whether a Traditional or Roth IRA is ultimately your best option is to consult with a financial advisor experienced in retirement planning. Our team at Correct Capital Wealth Management can help. With personalized advice tailored to your financial situation and goals, we'll guide you through the decision-making process to ensure your retirement planning is on track. Give us a call at 877-930-4015 or contact us online today.