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Traditional vs Roth IRAs

Both traditional and Roth IRAs are retirement accounts you manage yourself — meaning, they’re not tied to an employer. Both types come with the same annual contribution limit, which, in 2024, is $7,000 for savers under age 50 and $8,000 for those 50 and older.

But here’s where traditional and Roth IRAs differ:

  • Traditional IRA contributions are made with pre-tax dollars, while Roth IRA contributions are made with after-tax dollars.
  • Investment gains in a traditional IRA are tax-deferred, so you’re paying taxes eventually. Gains in a Roth IRA are completely tax-free.
  • Traditional IRA withdrawals are subject to taxes, while Roth IRA withdrawals are tax-free.
  • Traditional IRAs impose required minimum distributions (RMDs) that basically force you to spend down your plan balance in your lifetime. Roth IRAs don’t impose RMDs, allowing you to use them to pass wealth down to your loved ones and grow your money as long as you want to.

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Which IRA type is the most popular?

Research from the Investment Company Institute found that, as of 2022, traditional IRAs were the most common type held by U.S. savers. As of mid-2022, 40.9 million U.S. households had a traditional IRA, compared to 32.3 million with a Roth IRA.

However, it's worth noting that traditional IRAs have been available to savers for a longer period of time. Traditional IRAs were first introduced in 1974. Roth IRAs didn't become available until 1998.

Which IRA type do financial experts generally recommend?

Some financial experts insist that for the typical saver, a Roth IRA is a better bet. Financial personality Dave Ramsey says, "The Roth absolutely mathematically kicks the traditional's butt."

Geoffrey Schmidt, host of the Holy Schmidt! YouTube series, feels likewise: "With a Roth IRA, you have tax-free withdrawals,” he has said. “That means that in essence, you have more predictability in terms of your actual income during your retirement years, because you've taken the subject of tax off the table."

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What are the benefits of traditional vs Roth IRAs?

Traditional IRAs offer the benefit of tax-free contributions. And investment gains are tax-deferred, so your tax burden is pushed off until you’re ready to start withdrawing from your account, when you will typically be in a lower tax bracket.

But that’s where traditional IRA benefits end. With a Roth IRA, you might enjoy more perks.

Roth IRA gains are completely tax-free. You could earn millions of dollars in gains without ever having to pay the IRS a dime. And, as Schmidt points out, you get the peace of mind that comes with being able to take tax-free withdrawals.

Many seniors experience a drop in income during retirement. Not having to pay a portion of that reduced income to the IRS could eliminate a world of stress.

Plus, Roth IRAs don’t make you take RMDs. This gives you more flexibility with your money. You can let it sit and enjoy tax-free growth for longer if you don’t need to tap your account for income, or use your Roth IRA for inheritance purposes.

What are the drawbacks of traditional vs Roth IRAs?

The main drawback of Roth IRAs is missing out on a chance to shield some of your income from taxes during your working years. That said, a less obvious drawback is that Roth IRAs almost make it too easy to take early withdrawals.

With a traditional IRA, you’re generally penalized 10% for taking a withdrawal before age 59.5. With a Roth IRA, you can withdraw your principal contributions (not necessarily your gains, though) at any time without a penalty, because that money goes in on an after-tax basis.

This may seem like a good thing, since it gives you the flexibility to tap your Roth IRA in a pinch. But that flexibility could leave you short on retirement funds.

On the other hand, traditional IRAs have you paying taxes on your gains and withdrawals. And you’re forced to take RMDs during retirement, which limits your flexibility with your money, and could potentially create a huge tax burden for you later in life.

Which type of IRA is best for you?

Many financial experts will urge you to consider your tax bracket when deciding whether to save in a traditional IRA or a Roth. In a nutshell, you want your tax break when your tax burden is highest. So, if you think you’ll be in a higher tax bracket during your working years than in retirement, then a traditional IRA could make the most sense for you. If you expect to be in a higher tax bracket in retirement than during your working years, then a Roth IRA leads to the most tax savings, making it your better choice.

For many people, though, there may not be a huge difference in tax brackets between their working years and retirement. So in that case, Roth IRAs usually make the most financial sense.

Let’s say you contribute $300 a month to an IRA over 30 years and score an annual 8% return in your account, which is a bit below the stock market’s average. In that scenario, you’re looking at a nest egg worth about $408,000.

With a traditional IRA, you’re getting a tax break on the $108,000 you contributed to your account. But you’re paying taxes on a $300,000 gain.

With a Roth IRA, you’re paying taxes on your $108,000 in contributions. But you’re getting your $300,000 gain tax-free.

If your tax bracket basically stays the same throughout your life, then the Roth IRA is the clear winner. And even if your tax bracket is slightly higher during your working years, you might still come out ahead financially with a Roth IRA if the gains portion of your account is significantly higher than the contribution portion.

For the most part, it pays to look at a Roth IRA for retirement unless you’re in a very high tax bracket during your working years and expect to drop into a much lower one during retirement. But if you’re not sure which IRA option is best for you, consult a financial advisor and have them help you run the numbers to land on the best choice.

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Maurie Backman Freelance Writer

Maurie Backman is a freelance contributor to Moneywise, who has more than a decade of experience writing about financial topics, including retirement, investing, Social Security, and real estate.

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