Are you curious about the difference between a Traditional IRA and a Roth IRA?

Don’t worry, I’ve got you covered.

Roth and Traditional Individual Retirement Accounts (IRAs) are two popular retirement savings options. Both offer tax advantages but differ in how contributions and withdrawals are taxed.

If you plan on opening an IRA and saving for retirement (which you should), it’s a good idea to understand your options so you can create a savings and investment strategy to meet your retirement goals.

Here are the differences you need to know about:

Tax Benefits

The key difference between the two accounts is when you pay taxes.

Roth IRA: You pay taxes now and enjoy tax-free money in retirement (age 59½ and older).

Traditional IRA: You pay taxes later when you take the money out in retirement (also age 59½ and older).

Contribution Limits

Because of their tax advantages, IRAs have contribution limits:

• Under age 50: $7,000 per year

• Age 50+: $8,000 per year

You can contribute to both a Roth and a Traditional IRA in the same year, as long as the total amount does not exceed the maximum allowable contribution limit.

Contribution Time Frame

You can make a Roth or Traditional IRA contribution for a given year anytime between January 1 and the tax-filing deadline of the following year (April 15th).

For example, you have until April 15, 2025, to make a 2024 IRA contribution.

Income Limits

The IRS sets income limits for contributions to a Roth IRA to ensure fairness. These limits prevent high-income earners from disproportionately benefiting from the tax advantages of a Roth IRA and encourage middle-class workers to save for retirement.

Income limits based on your filing status:

Single Individuals

• < $146,000 = $7,000

• ≥ $146,000 but < $161,000 = partial contribution

• ≥ $161,000 = not eligible to contribute

Married filing jointly

• < $230,000 = $7,000

• ≥ $230,000 but < $240,000 = partial contribution

• ≥ $240,000 = not eligible to contribute

There are no income limits for Traditional IRAs. Anyone 18 or older with earned income can open and contribute to a traditional account.

Required Minimum Distributions (RMDs)

Roth IRAs: Do not require you to withdraw a minimum amount of money at a certain age. Your money can grow tax-free indefinitely.

Traditional IRAs: Require you to withdraw a minimum amount of money starting at age 73, as the government eventually wants to collect the taxes you’ve been deferring.

Closing Thoughts

So, you’re probably wondering which account you should open.

Survey says: it depends.

But the general rule of thumb is if you think you’ll be in a lower tax bracket today than you will when you retire, you should contribute to a Roth IRA.

And if you think you’ll be in a higher tax bracket today than when you retire, you should contribute to a Traditional IRA.

Make sense?

Hope it does. If you don’t already have one, open an IRA this weekend.

You’ll thank yourself later.

Darrell