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Roth vs. Traditional: Which IRA is best for me?

02.18.20
By: American Heritage

We have all heard it before — start saving now, so you can enjoy retirement on your terms. Unfortunately, if you’re like most 20-somethings, contributing to a retirement account is a task that tends to fall down your ever-growing list of to-dos. From student loans to rent and bills, it’s easy to understand how retirement planning, like selecting a Roth vs. traditional IRA, can be neglected.

In fact, it is estimated that “66% of people between the ages of 21 and 32 have absolutely nothing saved for retirement, according to the National Institute on Retirement Security. To help get you started and escape that statistic, it is helpful to consider your retirement options and understand the differences between a Roth vs. traditional IRA, two important options for any retirement strategy.

 

4 Differences Between a Roth vs. Traditional IRA

 
1.Taxes

Perhaps the most significant difference between a Roth and traditional IRA is how taxes are applied to each. To put it simply, Roth accounts grow tax free since “you pay taxes upfront” on those funds and for a traditional IRA, taxes are paid when you withdrawal from the account, meaning those contributions are tax-deferred (Nerdwallet).

 

2. Contribution Limits

If you’re considering a Roth vs. traditional IRA, the good news is that you can contribute to both — but with some limitations on your investments. Specifically, the total contributions to a traditional or Roth IRA account cannot exceed $6,000 if you’re under 50, and $7,000 if you’re over 50 (NOTE: these are the combined limit amounts, i.e. you can’t put $5,500 both in a Roth and a traditional IRA). It’s also important to remember that your income level can impact this contribution limit. See #3 below for more information on income limits.

 

3. Income Limits

Depending on how you file your taxes and the amount of money you take home per year, the amount you can contribute to a Roth vs. Traditional IRA can differ. For example, if you are married filing jointly and your modified gross adjusted income (MAGI) is $196,000 or less, you can contribute $6,000. Contribution limits are phased out between $196,000 and $206,000. However, once you reach “$206,000 and above, you cannot contribute to a Roth IRA" (20 Something Finance).

For a traditional IRA, there are no income limits, however there are some tax deduction limitations. For example, if your MAGI is $65,000 or less, you can take a full deduction. If it’s more than $65,000, but less than $75,000, you get a partial deduction, and if it’s over $75,000, you cannot take a deduction” (20 Something Finance).

While this may seem convoluted, don’t let it overwhelm you. Use the resources that are at your disposal to help you best understand evolving rules and guidelines that could impact your retirement strategy.

 

4. Withdrawals

With a Roth account, there is no required minimum distribution, meaning you are not required to withdraw funds once you reach a certain age. However, with a traditional IRA, you must begin taking a required minimum distribution from your IRA account no later than 70 ½ years of age.

 

If you're interested in setting up a Roth and/or traditional IRA or would like more information, contact the American Heritage Investment & Retirement Center (IRC) and we’ll be happy to schedule a free consultation.