Traditional vs. Roth IRAs: Determining Your Ideal Retirement Account

When evaluating your retirement account options, one of the first things you’ll need to do is decide between a Traditional and a Roth IRA. Each offers its own benefits and has specific requirements. However, it’s essentially a matter of whether you want the tax benefit upfront when contributing to your IRA or whether you want your tax benefit later when taking distributions.

With a Traditional IRA, you enjoy immediate tax benefits and will have to pay taxes once you start taking distributions in retirement. A Roth IRA, on the other hand, allows your money to grow tax-free.

So, which type of IRA is right for you? Read on for a breakdown of each and its considerations.

2024 Maximum Contributions

The maximum contribution for 2024 is $7,000. If you are 50 years or older, you can make an extra catch-up contribution of $1,000 for a total annual contribution of $8,000. This applies to both Traditional and Roth IRAs.

Traditional IRA

A Traditional IRA may allow qualified investors to make tax-deferred contributions, meaning the taxes will be paid once IRA distributions begin. These may be pre- or post-tax contributions. Most people tend to be in lower tax brackets upon retirement, so Traditional IRAs are generally ideal for those who expect this to be the case.

There are no income requirements—as long as you’re 18 years or older and receive earned income, you can contribute to a Traditional IRA. However, there are income limits for contributions to be tax-deductible. If you and/or your spouse have access to a workplace plan like a 401(k), it could limit your ability to deduct your IRA contribution. In this instance, it’s best to utilize your employer-sponsored plan first.

Traditional IRA withdrawals are penalty-free, but they will be taxed as current income after you turn 59.5. Additionally, Traditional IRAs typically have required minimum distributions (RMDs), meaning you must start taking withdrawals after you turn 73.

Roth IRA

A Roth IRA takes contributions from your post-tax dollars. So while you don’t get tax benefits upfront, you’ll receive distributions tax-free as long as they’ve been in the account for at least five years and you are over age 59.5. If you’re projected to be in a higher tax bracket when you retire and begin taking withdrawals, a Roth IRA could be the best fit for you.

Roth IRAs are typically available to those with a modified adjusted gross income (MAGI) below a certain amount. In 2024, these limits are:

  • $161,000 for single tax filers
  • $240,000 for married taxpayers filing jointly

Remember, this must be earned income, not passive income. Roth IRA contribution withdrawals are also penalty- and tax-free at any time and do not come with mandatory distributions.

Setting Yourself Up for a Successful Retirement

Now that you understand the highlights of Traditional vs. Roth IRAs, keep in mind the bottom line: If it makes more sense for you to reap the tax benefits today, a Traditional IRA is likely best for you. However, a Roth IRA might be ideal if you would benefit by paying taxes now and avoiding them once you retire.

Do you have more questions about your financial situation and retirement goals? Speak with Carlson Investments today for guidance on what type of IRA would be your best option. We’ll be happy to help you create an enjoyable, comfortable future!

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