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Roth IRA vs Traditional IRA: Which is Right for You?

Family Finances | Retirement

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When it comes to retirement planning, Individual Retirement Accounts (IRAs) are a popular choice for many investors. There are two main types of IRAs: Roth IRAs and Traditional IRAs. Both offer tax advantages, but they function differently. Understanding the key differences between the two can help you decide which one is best suited for your financial goals and retirement needs.

1. Tax Treatment: The Key Difference

The primary distinction between a Roth IRA and a Traditional IRA lies in how and when they are taxed.

  • Traditional IRA: Contributions to a Traditional IRA are typically tax-deductible in the year you make them. This means that if you contribute $6,000 (the annual limit for those under 50), your taxable income for that year is reduced by that amount. For example, if you earn $50,000 and contribute $6,000 to a Traditional IRA, your taxable income is only $44,000 for that year. The catch, however, is that when you withdraw money during retirement, those withdrawals are taxed as ordinary income.
  • Roth IRA: Contributions to a Roth IRA are made with after-tax dollars. You don’t get a tax deduction in the year you contribute. However, the big benefit is that once you reach retirement age, your withdrawals are completely tax-free, provided you meet certain conditions (such as being over 59 ½ and having the account for at least five years). This can be particularly advantageous if you expect to be in a higher tax bracket when you retire.
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2. Contribution Limits

For 2025, the contribution limit for both types of IRAs is $6,500 per year if you’re under 50, and $7,500 if you're 50 or older, allowing for “catch-up” contributions. However, the eligibility to contribute to a Roth IRA phases out based on your income, while Traditional IRA contributions can still be made regardless of your income level, although the tax-deductible portion may be limited if you or your spouse participate in an employer-sponsored retirement plan.

3. Eligibility and Income Limits

Not everyone is eligible to contribute to a Roth IRA, especially if they earn a high income. Here’s a closer look at the eligibility for each account:

  • Traditional IRA: Anyone can contribute to a Traditional IRA as long as they have earned income (like wages or self-employment income). The tax deduction on contributions, however, can be limited if you, or your spouse, are covered by a retirement plan at work and your income exceeds certain thresholds. For example, in 2025, single filers making $73,000 or more or married couples earning $116,000 or more may not be eligible for a full deduction.
  • Roth IRA: Roth IRA eligibility is based on your modified adjusted gross income (MAGI). In 2025, if you're a single filer earning $153,000 or more or a married couple earning $228,000 or more, you’re ineligible to contribute directly to a Roth IRA.

4. Withdrawal Rules

When it comes to withdrawals, Roth and Traditional IRAs have different rules:

  • Traditional IRA: You can start taking withdrawals at age 59 ½, but all withdrawals are taxed as ordinary income. There’s also a Required Minimum Distribution (RMD) starting at age 73. This means you’re required to begin withdrawing a certain amount each year, which will be taxed.
  • Roth IRA: Since you’ve already paid taxes on your contributions, Roth IRAs allow you to withdraw your contributions at any time without penalties or taxes. Once you reach age 59 ½ and have held the Roth IRA for at least five years, you can also withdraw the earnings tax-free. There are no RMDs with a Roth IRA, so your money can continue to grow tax-free for as long as you want, even beyond retirement.

5. Ideal Scenarios for Each Account

While both IRAs can be beneficial, they are suited to different types of individuals depending on their financial situation.

  • Traditional IRA: A Traditional IRA may be the right choice if you want immediate tax savings and expect your tax rate to be lower during retirement. If you're in your peak earning years, contributing to a Traditional IRA can lower your taxable income now. Additionally, if you anticipate being in a lower tax bracket in retirement, paying taxes on withdrawals at that time could be advantageous.
  • Roth IRA: A Roth IRA is best for individuals who expect to be in the same or a higher tax bracket during retirement. If you’re early in your career and your tax rate is relatively low, contributing to a Roth IRA allows you to lock in today’s lower tax rates while benefiting from tax-free growth and withdrawals later on. It's also a great option if you want more flexibility in retirement and prefer not to worry about RMDs.

Conclusion: Which IRA is Better for You?

Roth IRAs tend to offer more flexibility due to their tax-free withdrawals and lack of RMDs. Traditional IRAs are more rigid, with RMDs at age 73, which could force retirees to take taxable distributions whether they need the funds or not. Ultimately, the choice between a Roth IRA and a Traditional IRA depends on your personal financial goals, income level, and retirement plans.

In some cases, individuals may even choose to invest in both types of accounts, diversifying their tax strategy for the future. Whichever you choose, it’s important to start saving early and take full advantage of these retirement tools to build a more secure financial future.

The content provided in this blog is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Some products not offered by JVB. JVB does not endorse any third parties, including, but not limited to, referenced individuals, companies, organizations, products, blogs, or websites. JVB does not warrant any advice provided by third parties. JVB does not guarantee the accuracy or completeness of the information provided by third parties. JVB recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

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