Traditional or Roth IRA: Which Is Better for You?
So, which one is right for you? That depends on when you want to pay taxes and how you see your financial future. Let's break it down so you can make the best decision for your retirement goals.1
What Is an IRA?
An IRA (Individual Retirement Account) is a tax-advantaged account that helps you save for retirement. The key benefit of an IRA is that it allows your money to grow with tax advantages, giving you more savings over time.
There are two main types of IRAs:
- Traditional IRA – May provide a tax break now, but you'll pay taxes later.
- Roth IRA – No upfront tax deduction, but withdrawals in retirement are potentially tax-free.
How a Traditional IRA Works
A Traditional IRA allows you to make pre-tax contributions, which can lower your taxable income for the year. Your money grows tax-deferred, meaning you don't pay taxes on gains until you withdraw funds in retirement.
✅ Best for:
- People who expect to be in a lower tax bracket in retirement.
- Those who want to reduce their taxable income now.
💰 Tax Benefits:
- Contributions may be tax-deductible, depending on your income and filing status.
- You won't owe taxes on the money until you withdraw it.
⚠️ Things to Consider:
- Withdrawals in retirement are taxed as regular income.
- Required Minimum Distributions (RMDs) begin at age 73 — you must withdraw a certain amount each year, even if you don't need it.
- If you withdraw before age 59½, you may pay a 10% penalty, plus taxes.
How a Roth IRA Works
A Roth IRA is funded with after-tax money, meaning you don't get a tax break upfront. However, your money grows tax-free, and withdrawals in retirement are completely tax-free.
✅ Best for:
- People who expect to be in a similar or higher tax bracket in retirement.
- Those who want tax-free withdrawals in retirement.
- Individuals who want more flexibility — there are no Required Minimum Distributions (RMDs).
💰 Tax Benefits:
- Your money grows tax-free.
- Withdrawals in retirement are completely tax-free if you follow IRS rules.
⚠️ Things to Consider:
- Contributions are not tax-deductible, so you won't lower your taxable income now.
- There are income limits — high earners may not qualify.
- Early withdrawals of earnings (not contributions) before age 59½ may result in taxes and penalties.
Traditional vs. Roth IRA: Side-by-Side Comparison
Traditional vs. Roth IRA: Side-by-Side Comparison
| Feature |
Traditional IRA |
Roth IRA |
|---|---|---|
|
When You Pay Taxes |
Withdrawals are taxed in retirement |
Contributions are taxed upfront, but withdrawals are tax-free |
|
Tax Deductibility |
Contributions may lower taxable income |
Contributions are not tax-deductible |
|
Required Withdrawals (RMDs) |
Yes, starting at age 73 |
No, funds can stay in the account indefinitely |
|
Early Withdrawal Rules |
Penalty on withdrawals before age 59½ (except for certain exceptions) |
Contributions can be withdrawn anytime, but earnings have restrictions |
|
Income Limits |
Income limits apply (consult a tax adviser) |
Income limits apply (consult a tax adviser) |
|
Best For |
Those expecting a lower tax rate in retirement |
Those expecting a higher tax rate in retirement |
Which IRA Is Right for You?
Still unsure? Ask yourself these questions:
❓ Do you want a tax break now or in retirement?
- If now, a Traditional IRA might be better.
- If later, a Roth IRA allows for tax-free withdrawals in retirement.
❓ Will your tax rate be higher or lower in retirement?
- If you expect a lower tax rate, a Traditional IRA may help you save on taxes now.
- If you expect a higher tax rate, a Roth IRA lets you lock in today's tax rate and withdraw tax-free later.
❓ Do you want to access your contributions before retirement?
- A Roth IRA allows you to withdraw contributions (not earnings) at any time, penalty-free.
💡 Tip: Some people contribute to both types of IRAs (if eligible) to diversify their tax strategy.
How to Get Started with an IRA
Ready to start saving? Here's what to do next:
✔️ Check your eligibility – Make sure you meet income requirements for a Roth IRA.
✔️ Decide how much to contribute – The IRS sets annual contribution limits (check current limits).
✔️ Choose a provider – Banks, credit unions, and investment firms offer IRA accounts.
✔️ Start early – The sooner you contribute, the more time your money has to grow.
Final Thoughts
Both Traditional and Roth IRAs offer great benefits — it all depends on when you want to pay taxes and your long-term financial goals. If you're unsure which one is best for you, consider speaking with a financial expert who can help guide your decision.
📞 Need help setting up an IRA? Contact Coastal Credit Union today at 800-868-4262, or by visiting a branch to explore your options and start saving for your future!