Personal Finance

Roth or Traditional IRA: Which Is Better for You?

By Steven LaFleur

Since I started working as a financial advisor I have had so many people ask me the same question, “What is the difference between a Roth IRA and a Traditional IRA?” I am going to lay out the basics below on the differences, but be sure to ask someone for help to make sure you are making the best financial choice for your situation.

To start off with, an IRA is an investment account that is used to grow our investments without the earnings being taxed by the government, so we keep more of our money when we access it in retirement. In regards to a Roth vs. Traditional IRA, it mostly comes down to how much you can contribute, how the accounts are taxed and how much income you earn. (For related reading, see: IRA Contributions: Deductions and Tax Credits.)

Below is a chart comparing a Roth IRA and a Traditional IRA:

Roth IRA Traditional IRA
Is there an income limit? Yes, it depends on your tax status and can change each year No
When do you pay taxes on money you put into the account? When you initially contribute money to the account When you take money out of the account, usually in retirement
What tax rate is used? Your tax rate when you contribute Your tax rate when you take money out
How much money can I contribute to my IRA? $5,500 – this changes year to year and depends on your tax status and age $5,500 – this changes year to year and depends on your tax status and age
Can I contribute $5,500 to each account per year? No, you can only contribute a total of $5,500 combined No, you can only contribute a total of $5,500 combined
Are there early withdrawal penalties? Yes, if you take money out before age 59.5 Yes, if you take out money before age 59.5
Is there a cutoff age where I can no longer make contributions? No Yes, age 70.5
Does the government make me take out any money? No Yes, after age 70.5 the IRS will make you take out a certain amount of money per year called a required minimum distribution
Are there ways to take out money before age 59.5 without penalty? Yes, but with only qualified expenses Yes, but with only qualified expenses

In the end, opening an IRA or utilizing your 401(k) through work is a great idea to create passive income in old age so you can live the life you want. Even if you do not want to retire down the road, by saving now and utilizing these tax advantage accounts you are creating wealth for the future that will help in achieving your future goals. (For more from this author, see: 10 Common Habits That Can Increase Wealth.)

This article was originally published on Investopedia.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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