What IRA type is best for you?

We’re going to spare you the “it depends” here, and instead lead by highlighting that for most people who are unsure which option is best for them, a Roth IRA is increasingly recommended as the preferred choice amongst tax and personal finance experts.  

This is largely due to the greater flexibility that Roth IRAs offer account holders (for those that qualify for one).

There are a number of more granular differences between Traditional and Roth IRAs, but it’s important to keep in mind that whatever choice you make - it’s difficult to go wrong.

For a deeper dive into the nitty gritty of comparing Traditional against Roth IRAs, read on below.

What are the main differences between Traditional and Roth IRAs?

The primary difference between the Traditional and Roth IRAs lies in the timing of the tax benefits offered: 

  • Traditional IRAs offer you tax breaks up front but none in retirement.  
  • Roth IRAs offer the opposite: no upfront tax breaks, but tax-free withdrawals at retirement. 

So which of these options is better? 

Well, conventional wisdom would suggest that you choose Traditional IRAs if you believe your tax rates will be lower at retirement, and Roth IRAs if you believe your tax rates will be higher at retirement.  

The problem with this advice is that no one truly knows where tax rates will be decades, or even years down the line.

This is why many experts are increasingly recommending Roth IRAs, as they offer firm, immediate advantages over Traditional IRAs, such as:

  • The ability to contribute at any age, even after you’re retired
  • No penalties if you need to withdraw your contributions before retirement
  • No mandatory withdrawals based on your age

Probably the biggest downside of Roth IRAs is that they can be off-limits to very high earners. To see the latest income qualification thresholds for Roth IRAs, please see this link.  If you earn above these thresholds but still want to open a Roth IRA, click here.

For a summary of the rest of the main differences between Traditional and Roth IRAs, see the above table.

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