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For most taxpayers, you have until April 15th of the
following year to contribute up to $7,000 ($8,000 if age 50 or over) into a
Traditional IRA or a Roth IRA. Is an IRA an option worth considering for
you? If so, which is better?
Traditional IRA
A Traditional
IRA is an individual savings account that allows you to contribute money
for your retirement. Depending on your income level, you may deduct the
contributions from your taxable income. Any earnings made in a Traditional
IRA account remain tax-deferred until the money is withdrawn from the
account. After the account holder reaches age 73 you may no longer make
contributions into your Traditional IRA and minimum required distributions
must be taken from the account each year. Anyone with earned income can
create a Traditional IRA, but if you also have a retirement account with an
employer, there are income limits to the amount you can contribute to your
IRA in pre-tax dollars.
Roth IRA
A Roth IRA is
an individual retirement account that allows you to contribute income that
has already been taxed (after-tax dollars). Withdrawals of earnings on
contributions from Roth IRA accounts are federal income tax-free so long as
a 5-year holding period has been met and the account holder is at least 59
1/2 years old, disabled, or deceased. Withdrawals of contributions are
always tax-free since you already paid the tax on the contributions. There
are no required minimum distributions nor are there age limits for
contributions. In 2024, individuals who earn more than $161,000 and married
joint filers who earn more than $240,000 are ineligible to contribute to a
Roth IRA.
Which is better?
- Traditional
IRA contributions that qualify for pre-tax treatment will allow a
larger beginning investment to compound over time versus a Roth IRA.
- Roth
IRA contributions, though smaller because of tax treatment, could
create earnings that are never taxed.
- Roth
IRA accounts have more flexible contribution and withdrawal rules.
So the answer is. . .it all depends. If you think tax rates
will be significantly higher when you withdraw your retirement savings,
then think seriously about a Roth IRA. This is the case in 2026 when
temporary tax laws expire and the maximum tax rate returns to 39.5%
(currently 37%).
If you think
your retirement account investments will perform well, then perhaps the
earnings growth in a Traditional IRA will more than pay for the additional
tax at time of withdrawal.
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