Financial 4.0 logo
EventsMarketplace
Sign In
BUDGETINGLIFESTYLE & TRAVELINVESTING

Comparing Roth and Traditional IRAs

Written by: Haley (she/her)

2 min read | Published: April 2, 2024

Image for Comparing Roth and Traditional IRAs

After deciding you want to invest in an individual retirement account or IRA, how do you determine whether a Roth or Traditional IRA is best for you? A Roth IRA allows your funds to grow tax free. A Traditional IRA allows your funds to grow tax deferred, meaning you pay taxes at the time of withdrawal. Let’s dig into the characteristics of both, so you can make an informed decision about which is best for you and your financial goals.

In terms of eligibility requirements, Roth IRAs are open to anyone 18 or older who has earned income within specific IRS income limits. Traditional IRAs are open to anyone 18 or older with earned income. Income does impact whether contributions are tax-deductible for Traditional IRAs, though.

The primary difference between Roth and Traditional IRAs is how they are taxed. Roth IRAs grow tax-free and traditional IRAs grow tax-deferred until withdrawn. Roth IRA contributions are made with after-tax dollars and are not tax-deductible. Traditional IRA contributions are made with after-tax dollars as well, but they are tax-deductible if you meet specific income requirements. Oftentimes, Traditional IRAs are thought to be a good fit if you expect to be in a lower tax bracket when you retire. Roth IRAs can be best if you are in a lower tax bracket today and anticipate being in a higher tax bracket when you retire. It is important to note that if you open a Roth IRA, you can no longer convert it to a Traditional IRA later.

In addition to tax implication and contribution differences, there are also different rules around withdrawals. Roth IRAs do not have a required minimum distribution (RMD), which means you are not required to withdraw a minimum amount of money at a certain age. Traditional IRAs, in comparison, typically require you to withdraw a minimum amount of money starting at age 73. For Roth IRAs, you can withdraw contributions — but not investment earnings — at any time without additional taxes or penalties from the IRS. This can be especially helpful if you decide you would like to use the funds for a down payment on a home or for another large expense or life event. It’s important to note that if you withdraw earnings from a Roth IRA prior to age 59½, you may incur a 10% tax penalty. Any withdrawals made from a Traditional IRA prior to you turning 59½ will require you to pay taxes on those earnings and contributions as well as the 10% tax penalty.

Regardless of the individual retirement account you choose, once you open an IRA and select your investments, you will be saving money for your future with the advantage of compound interest. Compound interest is the interest on savings calculated on the initial principal investment and accumulated interest from previous periods. So, the compound interest you earn — whether in a Roth IRA or a Traditional IRA — allows your money to work for you. Pick the one that’s best for you and watch your money grow!

Sources: https://www.investopedia.com/terms/r/rothira.asp

https://investor.vanguard.com/accounts-plans/iras/traditional-ira#:~:text=A%20traditional%20IRA%20is%20a,you%20make%20withdrawals%20in%20retirement

https://www.nerdwallet.com/article/investing/what-is-a-roth-ira

https://www.fidelity.com/retirement-ira/ira-comparison

https://www.cnbc.com/select/traditional-ira-vs-roth-ira/

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras#:~:text=You%20can%20roll%20over%20your,over%20to%20another%20Roth%20IRA

https://www.investopedia.com/terms/c/compoundinterest.asp

Was this helpful?

Browse Related

Browse by Category

Image for Budgeting

Budgeting

Image for Career

Career

Image for College

College

Image for Credit

Credit

Image for Fraud

Fraud

Image for Investing

Investing

Image for Lifestyle & Travel

Lifestyle & Travel

Image for Student Athletes

Student Athletes

Image for International Students

International Students


MSU Federal Credit Union
www.msufcu.org

Produced by Michigan State University Federal Credit Union. MSU Federal Credit Union and related trademarks and logos are trademarks of MSU Federal Credit Union. Federally insured by the NCUA. Equal Housing Lender.

If you are using a screen-reader or other auxiliary aid and are having problems using this website, please call 800-678-4968 for assistance. All products and services available on this website are available at MSUFCU full-service locations.

LEARNBLOGSPODCASTSQUIZZESCALCULATORSEVENTSMARKETPLACEFAQABOUTCONTACT US
Download on the App Store

Copyright © 2024 Reseda Group LLC, used under license.

Terms of Use
Privacy Policy
Disclaimer