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Roth IRA vs. traditional IRA: Which one is better?

Roth IRA vs Traditional IRA written in the notepad.
A Roth IRA and a traditional IRA both have unique benefits. Getty Images/iStockphoto

If you're looking to start investing but don't have access to an employer-sponsored 401(k) - or if you've maxed out your 401(k) and would like to invest even more - opening an IRA may be a wise choice.

It's easy to open a Roth IRA. Skip the hassle and get started today with a financial advisory company that can provide online investment and cash management services instantly. Explore your Roth IRA options today and start saving!

When going this route, you have two options to choose from: a Roth IRA and a traditional IRA. Here's a deep dive into each to help you decide which route to go.

What's an IRA?

An IRA is a tax-advantaged retirement account that you can open by yourself. In 2022, the annual contribution limit is $6,000 a year or $7,000 a year for those 50 or older. However, if you earned less than $6,000, then you can only contribute the amount earned. There is no age requirement to open an IRA. If you're working, you can open an IRA. 

An IRA is a popular alternative to a 401(k) because you can open it with any company you choose and pick the investments that suit your portfolio best. 

If you're looking to open a Roth IRA, you may want to use a robo advisor like Betterment that can set up your IRA for you and choose investments on your behalf. Learn more.

Roth IRA vs. traditional IRA

If you're wondering what the difference between a Roth IRA and a traditional IRA is, you're not alone. The most important difference is how taxes work for both types: 

  • Roth IRA: When you contribute to a Roth IRA, you will still pay taxes on the contributions. But when you withdraw funds, you won't have to pay income tax on them. 
  • Traditional IRA: If you contribute to a traditional IRA, you can take a tax deduction on your contributions. However, in retirement, you will have to pay taxes on any withdrawals. 

Here are the pros and cons of each investment vehicle. 

Roth IRA pros 

  • Can withdraw funds tax-free in retirement: The biggest benefit to using a Roth IRA is that you can withdraw money tax-free in retirement. This means you won't have to take taxes into account when budgeting after you've stopped working. 
  • Can withdraw contributions at any point with no fees: Some investors put their emergency fund in a Roth IRA because you can withdraw your contributions at any point penalty and tax-free. You may even be able to withdraw earnings from your Roth IRA if you meet certain criteria, like using the money to purchase your first home or to pay for educational expenses. (Otherwise, you must wait until after age 59½ and a 5-year holding period.)

If the benefits of having a Roth IRA sound favorable to you then consider reaching out to a professional who can help you build an account now.

Roth IRA cons

  • Can only contribute if you earn below a certain amount: Only those who earn below a certain amount can contribute to a Roth IRA. In 2022, individuals with a Modified Adjusted Gross Income (MAGI) below $129,000 can contribute the full amount, and those with an MAGI above $144,000 cannot contribute to a Roth IRA at all. Those whose incomes fall in between can contribute a prorated amount. Married couples filing jointly can contribute the full amount if their MAGI is $204,000 or less. They cannot contribute if their MAGI is above $214,000. If their income is between those two figures, they can contribute a prorated amount.
  • Must wait five years to withdraw earnings: With a Roth IRA, you must abide by the 5-year rule before you can withdraw your tax-free earnings. 

Traditional IRA pros

  • Can take tax deduction on your contributions: You can deduct contributions on your taxes, thereby reducing your taxable income. This deduction can be especially useful for higher earners or those who are self-employed. If you anticipate having less income in retirement, then it may be better to use a traditional IRA instead of a Roth IRA.
  • Can lower your adjusted gross income (AGI) and help you qualify for certain benefits: Your AGI can help determine how much taxes you owe, which could save you some money in the long run. For example, it could help you qualify for more subsidies from the Healthcare Marketplace. You could also qualify for the Lifetime Learning Credit if your modified AGI is below a threshold. 

Traditional IRA cons

  • You can only deduct contributions on your taxes if you do not have access to an employer-sponsored retirement plan like a 401(k). If you do have access to one, you can deduct contributions as long as your modified adjusted gross income (MAGI) is $68,000 or less for individuals and $109,000 or less for married couples filing jointly. 
  • You will have to pay income tax on the withdrawn amount in retirement. The income tax rate will depend on how much you withdraw annually and any other sources of income you have, like Social Security benefits, pensions and more.
  • Once you turn a certain age, either 70.5 or 72, you have to start taking the Required Minimum Withdrawals (RMD) from your traditional IRA. This is an amount that you must withdraw or you will face stiff penalties. Roth IRAs, meanwhile, do not have RMDs.

How to choose

Picking between a traditional and Roth IRA can be difficult. Some experts recommend using a Roth if you're young and at the beginning of your career and eventually switch to a traditional IRA once you're a high earner. You can also contribute to both a Roth and traditional IRA, as long as you don't contribute more than the total annual limit. 

If you're not sure which IRA is best for your specific situation, talk to a financial planner who can help you decide.

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