Traditional IRAs vs. Roth IRAs: What to Know

Windup tin bird toy on a blue background.

Planning for retirement is a key aspect of financial security. Individual Retirement Accounts (IRAs) are popular retirement savings options that can offer numerous advantages. However, deciding between a traditional IRA and a Roth IRA can be confusing and difficult. 

Better understanding the differences between the two IRAs can help you make a more informed decision about the best options for your retirement goals and dreams. 

What is a Traditional IRA?

Traditional IRAs are tax-advantaged retirement savings accounts that allow individuals to save for retirement while potentially enjoying immediate tax benefits. With a traditional IRA, contributions are made with pre-tax income. 

This means that contributions are deducted from your taxable income during the year they are made, therefore reducing your tax liability for that year. The money in a traditional IRA grows on a tax-deferred basis, which means you won’t owe taxes on the growth until you withdraw the funds during retirement.

One significant advantage of traditional IRAs is the potential for tax savings in the contribution year. By reducing your taxable income, you may find yourself in a lower tax bracket, which can translate into substantial tax savings.

However, when you withdraw funds during retirement, they are considered taxable income. It's also important to note that traditional IRAs require mandatory minimum distributions (RMDs) starting at age 70½, which means you must withdraw a certain amount each year.

What is a Roth IRA?

Roth IRAs offer a different approach to retirement savings. Contributions to a Roth IRA are made with after-tax income, meaning they do not provide immediate tax benefits. The primary advantage of the Roth IRA lies in the tax-free growth and tax-free withdrawals. If certain criteria are met, all earnings and qualified withdrawals from a Roth IRA are tax-free, even those made during retirement.

A key benefit of Roth IRAs is their flexibility. Unlike traditional IRAs, there are no mandatory minimum distributions for Roth IRAs, allowing you to retain control over your retirement funds and even pass them on to your beneficiaries. 

Additionally, Roth IRAs provide an excellent retirement savings option for individuals who anticipate being in a higher tax bracket during retirement. Because contributions to Roth IRAs are made with after-tax income, they do not contribute to your taxable income in the year they are made.

Which IRA Is Right for You?

Determining whether a traditional IRA or a Roth IRA is right for you depends on several factors including your current tax situation, expected future tax rates, and your retirement goals. Here are a few things to consider when deciding on an IRA.

  • Current tax situation. If you are in a higher tax bracket now and expect to be in a lower tax bracket during retirement, a traditional IRA's upfront tax deduction may be beneficial. If you are in a lower tax bracket currently and anticipate being in a higher tax bracket during retirement, a Roth IRA may offer more advantages.
  • Future tax rates. Predicting future tax rates can be challenging, but if you anticipate that tax rates will increase in the future, a Roth IRA's tax-free withdrawals may be more appealing.
  • Age and flexibility. If you are approaching retirement age and prefer to have more flexibility in managing your retirement savings, a Roth IRA's lack of mandatory distributions might be more advantageous.
  • Estate planning. Roth IRAs are often more beneficial for estate planning as they offer tax-free withdrawals for beneficiaries. If leaving a tax-free inheritance is a priority, a Roth IRA may be the better choice.

Final Thoughts

Traditional IRAs and Roth IRAs each have their own advantages. Consider your current and future tax situation, retirement goals, and personal preferences to make the best decision for your financial future. If you are unsure, consult a financial advisor who can help you navigate the complexities of IRAs and guide you toward the right choice. 

That said, the most important thing is to start saving for retirement as early as possible, regardless of the type of IRA you choose.

Discuss IRAs with a TwinStar Financial Advisor

Our team of financial advisors can help you with all your IRA questions and help you choose the right one. To schedule a no-risk, no-obligation consultation with a TwinStar financial advisor, call 800.267.4363. Check out our page for more on our IRA offerings.

Want to learn about all the services our financial advisors provide? Visit our website.

TwinStar Financial Advisors is a marketing name of Cetera Investment Services. Securities and insurance products are offered through Cetera Investment Services LLC (doing insurance business in CA as CFGIS Insurance Agency), member FINRA/SIPC. Advisory services are offered through Cetera Investment Advisers LLC. Neither firm is affiliated with the financial institution where investment services are offered. Located at: 1020 E 5th Ave, Olympia, WA 98501 (800)-258-3115. Investments are: * Not FDIC or NCUSIF insured * May go down in value * Not financial institution guaranteed * Not a deposit * Not insured by any federal government agency. © 2016 Cetera Investment Services LLC 15-1149 02/16 CER-CAMP-152647