Traditional vs. Roth IRA – Which To Choose?

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Choosing between a Traditional or Roth IRA investment account can be confusing. Knowing how these investment accounts work can help you to make financial decisions that can lead to early retirement!

I am excited to have a guest post by InspiretoFire.com. He will help you to understand the difference between a Traditional Roth and a Roth IRA.

Let’s get Started!

If you are looking at retirement accounts you might be wondering what is the difference between a Traditional vs Roth IRA. 

This article highlights the major differences and will help you determine which account is best for your situation. 

I think it’s so important to know your options, so I’m also sharing some “pro-tips” on getting the most from each account! 

How a Traditional Roth is Similar to a Roth IRA

  • Both have a deadline of April 15th to contribute to the account 
  • Contribution limits are the same ($6,000, or $7,000 if you’re age 50 or older) 
  • Both give you a tax advantage to invest for your retirement 

How a Traditional Roth is Different From a Roth IRA

The major difference between the Traditional VS Roth IRA is the way the government taxes the money. I came across the following illustration that breaks it down nicely: 

Traditional Roth vs. Roth IRA
Image Source: Voya.com

Some other keynotes not included in the graphic are: 

Traditional IRA: 

  • You are required to take minimum distributions (RMDs) starting at the age of 70 1⁄2.
  • Depending on your income you can get a tax deduction for contributions. Check with the IRS to see what their guidelines are for the current tax year.
  • There is an early withdrawal penalty of 10% unless you meet certain criteria such as qualified higher education expenses, first-time home purchase, certain medical expenses, or a 72t early distribution.

Roth IRA: 

  • Contributions to a Roth IRA are not tax-deductible since you are contributing AFTER-tax dollars.
  • There are income limits for contributing to a Roth IRA. (If you are over the income limits check out the Backdoor Roth).
  • No penalties are assessed for withdrawing your own contributions after 5 years. 
  • You are never required to take mandatory distributions. 
  • You can make contributions to your Roth IRA even after the age of 70. 
  • Contributions and gains related to your Roth IRA are tax-free. 

Which account is better for you?

The answer depends on your personal situation and your outlook for future tax laws. I would start by checking if your IRA contributions would be tax-deductible and if you qualify to contribute to a Roth account.

Choose Roth if: 

  • You believe you would rather pay the tax today because you are in a low tax bracket or because, in your opinion, taxes are low
  • You want the flexibility to take out your contributions after 5 years

Choose Traditional IRA if: 

  • You are in a relatively higher tax bracket and believe you will be in a lower bracket when in retirement. The tax deduction will help you save more on the higher taxes you would be paying today. 
  • You are on the path to financial independence. You can supercharge your investment returns by using these tax-advantaged retirement accounts. 

If you can do both then you should ask yourself: 

Do I believe I will pay more or less tax in my retirement years? 

Do I believe taxes are low and will eventually get higher due to changes in tax law? 

Will I be making more money when I get closer to my retirement years? 

Once you have answered these questions you can start your Roth investing plan for retirement!

Start Your Roth Investment Account Today

If you’re worried about having your money tied up until you are 60, don’t be! Using a Roth can help you to get your money before retirement age.

As you can see, investing in a Traditional or Roth IRA account isn’t complicated. Once you research the tax implications, depending on your income, you can start investing today. Make your money work for you!

You can use investment accounts to retire early. By early, I mean years before you turn 60! On InspiretoFire.com I discuss early retirement tips and much more!

For more information on ways to invest for your retirement, and financial independence, you can check out my blog where I have all the resources you need to reach your financial goals! 

You can also find me on Instagram!

Lastly, I am not a financial advisor or certified public accountant. Please review your plans with an investment professional. I provide this information to inspire people to think about their financial situation and how they can reach financial independence!

Let us know which Roth account you are going to start. Do you have any other investment tips for early retirement? Need a budget?

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