Roth IRA vs Traditional IRA: Which is Best for You?

Roth Ira Vs Traditional Ira

Individual retirement accounts (IRAs) come in multiple forms. Two of the most common types, the Roth IRA and traditional IRA, have different income requirements, tax treatments, contribution limits, and withdrawal rules.

Knowing these disparities will help you build a retirement plan that works for you.

Table of Contents

  1. Income requirements for Roth vs traditional IRA
  2. So which one should you pick? The bottom line

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Income requirements for Roth vs traditional IRA

Both limit your contributions to either A) the IRS-imposed contribution limit or B) your income, if you make less than the contribution limit for the tax year.

Roth IRATraditional IRA
The Internal Revenue Service (IRS) imposed income restrictions for Roth IRAs. To contribute the full amount, your modified adjusted gross income (MAGI) must be below $144,000 for single filers or $204,000 for married couples filing jointly in 2022. Contribution limits phase out as you earn more.Traditional IRAs don’t have income eligibility rules like Roth IRAs do. However, there are income limits on how much of your contributions you can deduct on your taxes.

Roth vs. traditional IRA tax treatments

Roth IRATraditional IRA
Roth IRA contributions are after-tax dollars. You cannot deduct these contributions on your taxes, but your investments get a chance to grow tax free. You don’t pay capital gains taxes on profits for qualified distributions. You may pay capital gains taxes on nonqualified distributions.Traditional IRA contributions serve as a tax deduction. It’s a tax-deferred account, meaning you pay income tax when you withdraw the money later in life. There are no capital gains taxes, only taxes at your ordinary income tax rate at the time of withdrawal (you can guess your future taxable income to estimate this).

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Comparing contribution limits

Roth IRATraditional IRA
Roth IRAs are subject to a $6,000 annual contribution limit for people under 50 years old, and $7,000 for people ages 50 and over. Because of Roth IRA income limitations, high earners may have a reduced contribution limit.Traditional IRAs are subject to a $6,000 annual contribution limit for people under 50 years old, and $7,000 for people ages 50 and over.

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Withdrawals in Roth IRA and traditional IRA

Roth IRATraditional IRA
Roth IRAs have no required minimum distributions (RMDs) while you’re alive. If you die, you can pass on your IRA to an heir, who has 10 years until they have to make RMDs. Roth IRA distributions are tax-free withdrawals. However, taxpayers may pay a 10% penalty or taxes on your investment earnings on nonqualified withdrawals (including an early withdrawal penalty before you reach 59.5 years old). Your first Roth IRA contribution must have been five years ago to make a penalty-free withdrawal.You must begin making RMDs the year after you turn 72 (the deadline is April 1 the year after your 72nd birthday). After that, you must take a yearly RMD by the end of each year. All withdrawals are subject to income tax. All withdrawals before age 59.5 are hit with an additional 10% penalty tax.


So which one should you pick? The bottom line

Choosing between a Roth and traditional IRA depends on your income. If you can expect to be in a higher tax bracket when you retire, or if you want your investments to grow tax free, Roth IRAs can help you build wealth. However, traditional IRAs have their perks, so it’s important to make a decision based on what works for you (they don’t call it personal finance for nothing!).

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FAQ's

Can I max out an IRA?

There is no lifetime max for IRA retirement contributions, but there are annual contribution limitations. More on that below!

What is the deadline for making IRA contributions in a given year?

You usually have until tax filing day (typically April 15) to make IRA contributions that count for the previous year.

Can I contribute to a Roth IRA, traditional IRA, and 401(k) at once?

Yes, but IRA contribution limits apply to all IRAs, not each individual account. Your 401(k) is a separate type of account, so you can contribute at the same time as IRA savings accounts up to the employer-sponsored retirement plan maximum in addition to the IRA account limits.

Can I convert a traditional IRA to a Roth IRA?

Yes, you can convert part or all of your traditional IRA to a Roth IRA.

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