IRA for Beginners: Roth or Traditional?

Personal Finance
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An Individual Retirement Account, or IRA, is a tax-advantaged savings account for retirement savings. Tax advantages can be in the form of a pre-tax contribution (i.e. contributions to the account are tax deductible), however, withdrawals are taxed as ordinary income. Whether you or your spouse already participates in a company sponsored retirement plan is also taken into consideration when evaluating your contribution deduction eligibility. Contributions can also be after tax, which includes no tax benefit, but withdrawals are untaxed.

Consider this chart which compares four common types of IRAs: 

  • Single: any amount.
  • Filing jointly: any amount.
  • Filing jointly with a spouse who is covered: same rules as above apply.

No amount is deductible.Not applicable.Rules for Traditional or Roth IRA apply depending on choice.No income limit.

  •  If you are single, full contributions are limited at $110,000, partial is limited at $125,000.
  • Joint  filers, full contribution: $173,000 and partial is: $183,000.

No income limit.Rules for Traditional or Roth IRA apply depending on choice.

Traditional IRA Roth IRA SEP IRA Spousal IRA
When can it be opened? Any age under 70.5. Any Age.
  •  Any Age.
  • Employee’s must be over 21, have 3 years of service out of the last five years, and earned at least $450 from employer over one year.
  • Rules for Traditional or Roth IRA apply depending on choice.
Any Age.
How much can be contributed? $5,000 annually, an extra $1,000 if you are over age 50. $5,000 annually, an extra $1,000 if you are over age 50. Employer can contribute $50,000 or 25% of employee compensation; whichever is smaller, per employee per year. $10,000 annually spread over both accounts, an extra $2,000 if over age 50.
How much is deductible if you are covered by an employer’s plan? Single, with a MAGI under $58,000: Your contribution is eligible for a full deduction. Under $68,000 for partial deduction. Married filing jointly: $92,000 or less for full deduction, no more than $112,000 for partial deduction. No amount is deductible. 25% of all participant’s compensation. Rules for Traditional or Roth IRA apply depending on choice.

NerdWallet’s recommendations 

The goal of an IRA is to maximize your tax-advantaged retirement savings. Don’t pass up the chance to save and invest while saving on your taxes. By using the table above, and applying it to you’re specific needs the IRA that is right for you should become evident.

Are you covered by an employer plan, and are not eligible for a full or partial tax deduction? A Roth IRA is the right way to go. This is because you have more freedom withdrawing your funds and are not able to reap the benefits of a tax deduction. If the retirement plan that your employer provides also matches your contributions, it is advisable to prioritize that account over any IRA you may open.

Other Expert Opinions:

Rob Jupille, president and founder of RTJ Financial Management, has this to say on the topic of IRAs:

“One of the biggest mistakes we see is [IRA holders] not making a contribution each year.  Often people don’t think about making a contribution until tax time, when it may be hard to come up with the money.  The easiest way to fully fund your IRA each year is to set up an automatic monthly or quarterly contribution.”
Derek Overstreet, president of New Millennium Insurance Services, cautioned to choose advisors with care, and also to remember IRAs when considering estate planning:

“Anyone can get licensed and say ‘I’m a financial advisor.’ Know who you’re dealing with before making any financial decision.”

“A common mistake is leaving an IRA to a trust. If you do, it all becomes taxable on date of death. A better strategy would be to name a beneficiary—that way, the beneficiary can decide when to be taxed.”

Cheryl Burbano, CFP with Ameriprise Financial, had this advice:

“As a young person starting out, the most important thing you need to know is that how well you live in retirement is directly correlated to how much you save over the years, how long, and how well you have invested your assets.  Congress will most certainly make adjustments to Social Security in the future that will further delay the full retirement benefits age, maybe to 70, while annually reducing benefit amounts.  You are left to make up the difference.”

David Brezik, v.p. of Retirement Product Management at E*Trade Financial, had this to say:

“The most important advice I’d give to a young person just starting to save for retirement is that time is on your side.  Beginning to save sooner allows young people to use time and the power of compounding to their advantage.  So if you want to reach your long-term goal of having a dream retirement, start young and invest regularly.”

Curtis Chambers, CFP and founding partner of Chambers Financial Group, has this analysis of the benefits of different types of IRAs:

“Most people think the big advantage of a Roth IRA withdrawals are income tax free. But this isn’t really the case: the big advantage is the eligibility limits are broader than those of a Traditional IRA. Current income limits for a Roth allow a single filer to earn up to $110,000 and joint filers to earn up to $173,000 and still qualify for a full contribution. By contrast, Traditional IRA limits are $56,000 for a single filer and $90,000 for joint. You may qualify for a Roth IRA even if you do not qualify for a deduction to a Traditional IRA!”