Roth vs. traditional: How to choose
The biggest difference between a Roth and a traditional IRA is how and when you get a tax break: The tax advantage of a traditional IRA is that your contributions are tax-deductible in the year they are made. The tax advantage of a Roth IRA is that your withdrawals in retirement are not taxed.
Thus most advice on the Roth IRA versus traditional IRA topic begins with a question: Do you think your tax rate will be higher or lower in the future?
If you can answer that question definitively, you can theoretically choose the type of IRA that will give you the biggest tax savings: If you expect your tax rate to be higher in retirement, choose a Roth IRA and its delayed tax benefit. If you expect lower rates in retirement, choose a traditional IRA and its upfront tax advantage.
One problem: It's hard to anticipate what your tax rate will be in retirement, particularly if you're decades away from leaving the workforce.
Fortunately, there are other ways to determine whether a Roth or traditional IRA is best for you.
First things first: Check your IRA eligibility
The IRS rules on IRA eligibility may make the Roth-versus-traditional decision for you. Your income will determine:
If you're eligible to contribute to a Roth.
How much of your contribution to a traditional IRA you can deduct from this year’s taxes. Traditional IRA deductibility is restricted only if you or your spouse has access to a workplace savings plan like a 401(k).
» Want a Roth but don’t qualify? Read how a backdoor Roth IRA might allow you to get one anyway.
Worth noting: You can contribute to a traditional and a Roth IRA during the same year, as long as the total amount does not exceed the maximum allowable contribution limit. In both 2020 and 2019, the most an individual is allowed to contribute per year is $6,000, or $7,000 if you’re age 50 or older. (Those limits are up from $5,500 and $6,500 in 2018.)
Why the Roth IRA works for most savers
Here’s why we generally recommend the Roth over a traditional IRA for those who qualify.
1. Early withdrawal rules are much more flexible with a Roth. Although we discourage early withdrawals from retirement accounts, if you do have to break the seal on the cookie jar, the Roth allows you to withdraw contributions — money you put into the account; not earnings — at any time without having to pay income taxes or an early withdrawal penalty.
Dip into a traditional IRA before retirement and the IRS isn’t as lenient: You’ll likely be socked with a hefty 10% early withdrawal penalty and owe taxes at your current income tax rate on the money you take out. There are a few exceptions to this rule — see our page on traditional IRA withdrawal rules for details — but you’ll need to proceed much more carefully than you would with a Roth.
2. The Roth has fewer restrictions for retirees. Traditional IRAs require you to start taking required minimum distributions (RMDs) at age 72.
Unless you’re inheriting the Roth IRA, it has no required minimum distribution rules: You’re free to let your savings stay put in the account to continue to grow tax-free as long as you live.
3. Unless you’re an extremely disciplined saver, you’ll end up with more after-tax money in a Roth IRA. Yes, both types of IRAs offer a tax break. But there’s an oft-overlooked benefit to the way the Roth treats taxes: Because your tax break doesn’t arrive till retirement (via tax-free withdrawals), you won’t be tempted to spend it before then. With a traditional IRA, the tax benefit is delivered annually when you file your taxes, which makes it easy to fritter the money away on any number of things.
To come out even in terms of after-tax savings, you have to be disciplined enough to invest the traditional IRA tax savings you get every year back into your retirement savings. If that seems unlikely to happen, then you’d be better off saving in a Roth, where you’ll arrive at retirement with more after-tax savings.
4. Funding a Roth in conjunction with your 401(k) provides tax diversification. The classic 401(k) plan offered by most employers provides the same tax benefits as a traditional IRA. Although some workplaces offer a Roth 401(k) option for employees, if yours doesn’t, diverting some of those retirement savings dollars into a Roth IRA will give you more options for managing your tax burden in retirement.
If you're ready to open a traditional IRA or a Roth IRA account, here are some of our top picks:
Making the call
The sole advantage of a traditional IRA for most people is the upfront tax break. And we’re not dismissing this benefit: It can be a huge advantage for high earners and a great incentive for people who might otherwise skip saving for retirement. In the short term, it effectively makes it “cheaper” to save for retirement, since the tax savings each year reduces the cost of your contributions.
But you will eventually have to face that tax burden in retirement, which means unless you really need that upfront tax break, it’s hard to go wrong with a Roth IRA. Still, don’t take our word for it: Browse the key differences between the accounts below and make your own call.