Roth IRA vs. Traditional IRA: Which is Better?
IRA stands for Individual Retirement Account. There are several different types, but two of the most popular are Roth IRAs and Traditional IRAs. Each of these types of IRAs has different structures, income limits, and their own pros and cons. But which is better?
Traditional IRAs give you a tax break when you contribute. In the year you make your contributions, you can deduct that amount on your tax return since you are using pre-tax dollars to fund your account, lowering your taxable income. A decrease in your taxable income could help you qualify for other tax credits and tax deductions.
In 2022, you can contribute up to $6,000 if you are under the age of 50, and $7,000 if you are 50 years old or above. There also are not any income limits for making contributions.
You can start taking penalty free withdrawals at the age of 59 & ½ and must begin required minimum disbursements by the age of 72. When you are withdrawing, you will have to pay taxes on the contributions and earnings. These distributions will be taxed as ordinary income with the tax rate based on your income bracket.
Roth IRAs give you a delayed tax benefit. Since you use after tax dollars to fund your account, you cannot deduct these contributions on your tax return.
The contribution limits are the same for Roth IRAs: in 2022, $6,000 annually if you are under the age of 50, and $7,000 annually if you are 50 years old or above.
There are income limits to be able to max out your Roth IRA. In 2022, the income limit for contributions is $129,000 for single filers and $204,000 for married couples filing jointly. Roth IRA contributions are completely eliminated once your income reaches $144,000 as a single filer and $214,000 for those married filing jointly.
The tax benefit comes when you begin to make withdrawals as you do not have to pay taxes on your contributions or your earnings. There also is not a required point for you to start withdrawing from the account. You can leave your funds in the account as long as you please, even if you want to leave it to be a part of your estate.
Which Is Better?
The biggest differences between Roth IRAs and Traditional IRAs is the timing of tax benefits. Traditional IRAs give you a tax benefit now while Roth IRAs can give you a tax benefit later. Since they both provide tax benefits, which type of IRA that works depends on what timing works better for you.
Instead of trying to predict if you’ll have a higher or lower income in retirement than you currently have, consider if you want to set aside money for taxes in the future or withdraw your retirement savings without having to worry about a tax burden.
A few other aspects to consider are:
- If there is more time between now and when you retire, the more tax-free growth of a Roth IRA can benefit you.
- Take a look at your family history to try and estimate how long your retirement funds need to last you. If many family members have lived well into their 80s and 90s, you might too, making the lack of withdrawal requirements important.
- You do not have to choose one or the other; you can have both a Roth IRA and a Traditional IRA to take advantage of both sides of the tax benefits. If you do this, just be sure that you stay within your annual contribution limits.
There are many different retirement accounts out there that can make picking the right ones for you a difficult choice. To help you make the right decisions on retirement accounts, have an advisor from Total Clarity Wealth on your side. If you need assistance planning your retirement, schedule a consultation today.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.