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One of the most common questions I hear is: Which is better—a Roth or a traditional IRA? People want to know the difference, the pros and cons, and which one will save them the most money. While I can explain the basics, the real decision depends on your unique situation, future income, tax considerations, and personal goals. There’s no crystal ball, and no single rule of thumb works for everyone. Here is some basic information to get you started but please speak with a financial advisor or CPA to review your options and what might make the most impact for your finances.
What Are IRAs?
Individual Retirement Accounts (IRAs) are available to most (not all) people and are separate and different to any employer-sponsored plans, government pensions, or Social Security savings. These accounts are designed specifically for saving for the future and come with tax benefits to encourage long-term saving. In exchange, early withdrawals—before age 59½—are usually penalized.
The most important distinction between the two different IRA options is that Roth IRA contributions are usually made with after-tax dollars and future withdrawals in retirement—including earnings—can be tax-free. In contrast, Traditional IRA contributions may be tax-deductible today, but withdrawals in retirement are most often taxed as ordinary income.
This is the source of almost all the debate as to which account is correct for which individual and there are many platitudes and much “sage” wisdom floating around to advise you as to the correct answer.
Common—but Incomplete—Advice:
- “Put money in a Roth when you’re young and a Traditional IRA when you’re older.”
- “Whenever you get a bonus, put it in a traditional IRA to lower your income that year.”
- “If you make more now than you expect in retirement, choose traditional; if less, choose Roth.”
- “Use a Roth if you want tax-free income in retirement. Use a Traditional if you want a tax break today.”
These rules hint at the most important consideration: when will you pay the least taxes on this money? Many assumptions don’t hold true: higher income doesn’t always mean a higher tax bracket, and your future circumstances—income, marital status, dependents, state taxes, political changes, or many other variables—can dramatically affect your tax future.
Traditional vs. Roth IRA: Key Differences
| Feature | Traditional IRA | Roth IRA |
| Tax Treatment | Tax-deferred: Contributions may be deductible now; withdrawals in retirement are most often taxed | Usually funded with after-tax dollars: Contributions not deductible; withdrawals in retirement, including earnings, are tax-free |
| Current Tax Impact | Can reduce taxable income today (subject to income limitations) | No immediate tax benefit, taxes already paid on funds |
| Retirement Tax Impact | Taxes owed when money is withdrawn | No taxes on withdrawals in retirement |
| Best For | Those who expect lower taxes in retirement | Those who expect higher taxes in retirement or want tax-free growth |
Traditional vs. Roth IRA: Key Differences Explained One Last Time
A Traditional IRA offers tax-deferred growth, meaning contributions may reduce your taxable income in the year you make them, but withdrawals in retirement are taxed as ordinary income. This can be advantageous if you expect to be in a lower tax bracket during retirement than you are today.
A Roth IRA, on the other hand, is funded with after-tax dollars, so contributions do not reduce your taxable income today. The major benefit is that withdrawals in retirement, including all investment growth, can be tax-free, which can be powerful if you anticipate being in the same or higher tax bracket later.
How This Can Get Complicated Quickly:
- A Traditional IRA contribution and tax deduction while living in a state with income tax could save you money if you retire to a state with lower or no income taxes on IRA withdrawals.
- Filing as head of household now, but single or married later, can change your tax bracket significantly and may shift the advantage to one plan or the other.
- Contributing to a traditional IRA while tax rates across the board are at alltime lows could backfire if the tax rates rise in retirement, even with the same income level.
- Starting a family, moving from dual to single income, buying a first home or a rental property, buying or selling a business, shifting from full time to part time, or many other life changes can shift your financial situation, your income rates, and your taxes dramatically, some of these changes might be predictable, some will always be a surprise.
- Contributing to a Traditional IRA can reduce your taxable income, which may lower student loan payments under income-driven repayment plans or may help with eligibility for other income based programs.
Choosing between the two IRA options depends largely on your current versus expected future tax situation, your retirement goals, and your need for flexibility. Many investors use a combination of both accounts in their financial plan to balance tax benefits now with tax-free growth later. This can provide greater flexibility during retirement or estate planning.
The key difference—and the source of much frustration—is whether you expect to be in a higher tax bracket now or in retirement. An answer that, for almost all of us, will always be an educated guess at best due to the nearly infinite variables that need to be considered over the course of our financial lives, most of which lies outside of our control. The more we know and understand about our own finances, the political and financial landscape outside, and about our own hopes, dreams, and life goals, the better that educated guess can be.
In short, choosing between a Roth and a traditional IRA is about more than age or income today—it’s about understanding your financial and life trajectory and making the strategy work for you with as much information as we can gather or predict as effectively as possible.
Though we have discussed the main differentiation between the accounts here, there are many other differences, advantages, and disadvantages to consider between Traditional and ROTH IRAs that may affect our decisions and preferences. If you want a deeper dive into these other differences and how they may affect your financial planning, click here.
Withdrawal rules, penalties, and distribution requirements vary depending on the type of account. It is important to understand these provisions before opening a specific account. Tax laws may change at any time, with effects that may be prospective or retroactive. Please consult with your legal counsel and tax advisor about your particular circumstances. The policy analysis provided by Creed Evans Financial does not constitute, and should not be interpreted as, an endorsement of any political party. Relying on any one or any combination of investment strategies or methods of analysis does not ensure a profit and does not protect against losses in declining markets.