Traditional and Roth IRAs: Benefits and Drawbacks (2024)

FAQs

Traditional and Roth IRAs: Benefits and Drawbacks? ›

With a Roth IRA, you contribute after-tax dollars, your money grows tax-free, and you can generally make tax- and penalty-free withdrawals after age 59½. With a Traditional IRA, you contribute pre- or after-tax dollars, your money grows tax-deferred, and withdrawals are taxed as current income after age 59½.

The main difference between a Roth IRA and a traditional IRA is how and when you get a tax break. Contributions to traditional IRAs are tax-deductible, but withdrawals in retirement are taxable as income. In comparison, contributions to Roth IRAs are not tax-deductible, but the withdrawals in retirement are tax-free.

Roth individual retirement accounts (IRAs) offer several key benefits, including tax-free growth, tax-free withdrawals in retirement, and no required minimum distributions (RMDs). One key disadvantage: Roth IRA contributions are made with after-tax money, meaning there's no tax deduction in the years you contribute.

The primary benefit of a Roth IRA is that your contributions and the earnings on those contributions can grow tax-free and be withdrawn tax-free after age 59½, assuming the account has been open for at least five years.

Traditional IRAs offer the key advantage of tax-deferred growth, meaning you won't pay taxes on your untaxed earning or contributions until you're required to start taking minimum distributions at age 73.

Traditional IRAs offer an upfront tax benefit, whereas Roth IRAs provide a back-loaded tax benefit. In other words, you can deduct all or part of your contributions to a traditional IRA but have to pay income tax on withdrawals in retirement.

The traditional IRA is a better choice when you're older or earning more, because you can avoid income taxes at higher rates on today's income.

Who benefits most from traditional IRA? ›

If you expect to be in a lower tax bracket during retirement, a traditional IRA might make the most financial sense. You'll reap tax benefits today while you're in the higher bracket and pay taxes later at a lower rate.

With a Roth IRA you contribute after-tax money to the account, so you don't get to avoid tax on your contributions, as you might with a traditional IRA. In exchange, your money grows tax-free and you'll be able to withdraw it tax-free at retirement, defined as age 59 ½ or older.

Key Takeaways. Roth individual retirement accounts (IRAs) are ideal retirement savings accounts if you're in a lower tax bracket now than you expect to be in during retirement. Millennials are well-poised to take full advantage of a Roth IRA's tax benefits and decades of tax-free growth.

The bottom line

If you expect tax rates in the future will rise, either because your wealth and income will be higher when you retire or a change in tax law, consider Roth accounts. Also, be sure to talk with your CPA or tax professional about whether a traditional or a Roth IRA—or both—makes sense for you.

A general guideline is that if you think your tax bracket will be higher when you retire than it is today, you may want to consider a Roth IRA—especially if you're younger and have yet to reach your peak earning years.

The main thing you'll want to consider when choosing between Roth and traditional accounts is whether your tax rate will be higher or lower during retirement than your marginal rate is now. If you think your tax rate will be higher, paying taxes now with Roth contributions makes sense.

Traditionally, tax professionals suggest withdrawing first from taxable accounts, then tax-deferred accounts, and finally Roth accounts where withdrawals are tax free. The goal is to allow tax-deferred assets the opportunity to grow over more time.