Roth IRA vs Traditional IRA | The Ultimate Guide - Biesinger FIRE Journey (2024)

FAQs

Is a traditional IRA ever better than a Roth IRA? ›

To come out even in terms of after-tax savings, you have to be disciplined enough to invest the traditional IRA tax savings you get every year back into your retirement savings. If that seems unlikely to happen, then you'd be better off saving in a Roth, where you'll arrive at retirement with more after-tax savings.

The earlier you start a Roth IRA, the better. There is no age limit for contributing funds, but there is an age limit for when you can start withdrawals. You must be 59½ years old to start withdrawing the earnings on contributions or you must pay taxes and penalties.

Traditionally, tax professionals suggest withdrawing first from taxable accounts, then tax-deferred accounts, and finally Roth accounts where withdrawals are tax free. The goal is to allow tax-deferred assets the opportunity to grow over more time.

Overall, converting to a Roth IRA might give you greater flexibility in managing RMDs and potentially cut your tax bill in retirement, but be sure to consult a qualified tax advisor and financial planner before making the move, and work with a tax advisor each year if you choose to put into action a multiyear ...

With a Roth IRA, you contribute after-tax dollars, your money grows tax-free, and you can generally make tax- and penalty-free withdrawals after age 59½. With a Traditional IRA, you contribute pre- or after-tax dollars, your money grows tax-deferred, and withdrawals are taxed as current income after age 59½.

Traditional IRAs have an upfront tax advantage. You get a tax deduction for your contributions in the current year but will be taxed on your withdrawals during retirement. A Roth IRA works the exact opposite. There's no upfront tax advantage.

5-Year Rule #2: Roth Conversions

If you want to withdraw that converted principal two years later at age 58, the withdrawal would be subject to the 10% early distribution penalty. However, if you wait until at least age 59 ½, you won't face the penalty even though it will be less than five years since the conversion.

There is no age limit to open a Roth IRA, but there are income and contribution limits that investors should be aware of before funding one.

Are You Too Old for a Roth IRA? There is no maximum age limit to contribute to a Roth IRA, so you can add funds after creating the account if you meet the qualifications. Roth IRAs can provide significant tax benefits to young people.

To make an educated choice between traditional and Roth deferrals, you want to consider your current tax situation and your anticipated situation in retirement. In general, you want to choose traditional deferrals if you expect your tax rate to decrease in retirement and Roth deferrals if you expect it to increase.

Can I contribute $5000 to both a Roth and traditional IRA? ›

You may contribute simultaneously to a traditional IRA and a Roth IRA (subject to eligibility) as long as the total contributed to all (traditional or Roth) IRAs totals no more than $7,000 ($8,000 if you're age 50 or older) for the 2024 tax year.

A backdoor Roth IRA is a conversion that allows high earners to open a Roth IRA despite IRS-imposed income limits. Basically, you put money you've already paid taxes on in a traditional IRA, then convert your contributed money into a Roth IRA, and you're done.

Since a Roth conversion increases taxable income in the conversion year, drawbacks can include a higher tax bracket, more taxes on Social Security benefits, higher Medicare premiums, and lower college financial aid.

No, there is no additional 10% tax on the amount converted. If you take a distribution, or elect tax withholding to pay for the taxes, and are under age 59 1/2, you may owe the 10% additional tax on the portion not converted.

Since the contributions were previously taxed, only subsequent earnings would be taxable on a conversion to a Roth IRA. If the investor converts $20,000 to a Roth IRA, 90% ($18,000) would be considered taxable income upon conversion and 10% ($2,000) would be considered after-tax IRA assets and not taxed.

Traditional IRAs offer the key advantage of tax-deferred growth, meaning you won't pay taxes on your untaxed earning or contributions until you're required to start taking minimum distributions at age 73.

Why consider a Traditional IRA? With a Traditional IRA, your money can grow tax deferred, but you'll pay ordinary income tax on your withdrawals, and you must start taking distributions after age 73. Unlike with a Roth IRA, there are no income limitations to opening a Traditional IRA.

A Roth individual retirement account (IRA), rather than a traditional IRA, may make the most sense for people in their 20s. Withdrawals from a Roth IRA can be tax-free in retirement, which is not the case with a traditional IRA. Contributions to a Roth IRA are not tax deductible, as they are for a traditional IRA.