ROTH IRA or Traditional IRA? The Answer is Yes.

For an embarrassingly long time I didn’t understand the difference between a ROTH and a traditional IRA. I’d heard advice in favor of a ROTH over traditional, but I didn’t understand why. After years of doing research for myself and others, I’d love to share what I’ve learned.

A few basics to start.

IRA stands for individual retirement account, and it’s just a type of retirement investment account available. There are several different vehicles for this account — 401k, SEP, 403b, and more.

Saving for retirement is imperative. If you want to ease the pedal off of hustle culture in your later years — or even if your middle years if you can — you must start setting aside some money when you’re younger to get there. Time is money.

Even though many other life stage financing options are available — loans for school, a house, a car — there are no retirement loans.

So unless you want to work until you die, you must be intentional about saving and investing.

And a great way to automate your retirement fund is through an IRA. Often these are tied to your workplace, but they don’t necessarily have to be.

Even though there are a few different methods of accessing an IRA there are two basic types: Traditional IRA & ROTH IRA. And the primary difference between the two is when you pay the taxes.

In a Traditional IRA, your money is put into the account untaxed. It comes straight out of your paycheck before taxes are taken out, for example. Instead of paying taxes on it before it’s invested, you pay those taxes as you take the money out, years later.

A ROTH IRA is the reverse. You pay taxes on the money that you’re putting into the account before it goes in, and then down the road you withdraw the balance tax-free.

There are a few other differences, but this one is the most striking contrast. What does it mean for you when choosing between the two?

A traditional IRA may be best for you if you feel your tax bracket will be lower when you retire, and a ROTH may be best if your tax bracket is expected to be higher.

Another important distinction worth mentioning is that each type has differing contribution limits. A ROTH has a much lower limit than a traditional. This year (2024) the ROTH limit is $7,000 per person, and the traditional limit is $23,000 per person. It’s a big difference.

For my mindset, there’s a clear better deal here - it’s the ROTH. I’d rather pay those taxes now than later on as much of my investment as I can.

As you see, the maximum is lower for a ROTH; however one shouldn’t be limited to saving only $7k per year if they have means to invest more.

For me and my family, we have both types. We prioritize the ROTHs to the max and funnel the rest of retirement savings into traditional. So when we retire someday, we’ll pay taxes on the money from our traditional IRAs and we won’t for our ROTHs.

For us, we don’t know what our tax bracket will be at retirement. And the bottom line is that it doesn’t really matter much. The most important factor of saving and investing is time and consistency, so don’t let yourself get bogged down in this part of the decision. Arm yourself with information and take action. Time is money.

Want to learn more about IRAs or about investing in general? Schedule a chat, and we can talk through your situation. It’s never too early and it’s never too late to learn more.