Traditional IRA vs. Roth IRA: Which Should You Open?
If you're saving for retirement, it's normal to have questions about the differences between a traditional IRA and a Roth IRA. Both can help you save for retirement, but the rules for contributions, withdrawals and taxes aren't the same. Comparing each option may help you choose the account that best fits your future goals.
What’s a Traditional IRA?
A traditional IRA is an individual retirement account that lets you save with certain tax benefits. Earnings grow tax deferred. This means you don't pay taxes on earnings until you withdraw the money in retirement.
Your contributions may be fully or partially tax deductible, depending on your income, tax filing status, and whether you or your spouse participate in a workplace retirement plan. Tax deductible means you may be able to subtract what you save from your taxable income (the amount of income the government calculates your taxes on). This might lower your tax bill for the year.
What are the age requirements on a traditional IRA?
You can contribute to a traditional IRA at any age as long as you have taxable income, like wages, salaries or self-employment funds.
Withdrawals from a traditional IRA are generally taxed as ordinary income. If you withdraw funds before age 59 ½, you may also owe an additional 10% tax penalty unless an exception applies.
Once you reach age 73, you're required to take out a minimum amount of money from your account each year. These are required minimum distributions (RMDs). RMDs from this IRA account are included in your taxable income.
What’s a Roth IRA?
A Roth IRA is a retirement account that lets you contribute money after you pay taxes on it. In return, qualifying withdrawals in retirement may be tax free.
To get the full tax benefits, you’ll need to meet these requirements:
- Age: Generally, you must be age 59½ or older to withdraw money.
- Five-year rule: The account must be open for at least five years.
You can contribute to a Roth IRA at any age, as long as you earn money and meet the account's income limits. Unlike other retirement accounts, Roth IRAs don't make you take withdrawals at a certain age during your lifetime.
For withdrawals taken before age 59 1/2, the earnings portion can be subject to ordinary income tax plus a 10% early withdrawal penalty. There are exceptions that may waive the 10% penalty.
What Are the Differences Between Traditional and Roth IRAs?
Traditional and Roth IRAs have a few important differences that may affect how and when you pay taxes, access your money, and qualify to contribute:
Differences | Traditional IRA | Roth IRA |
Tax benefits | Potential tax deduction now; taxable withdrawals | After-tax contributions; tax-free qualified withdrawals |
Required minimum distributions (RMDs) | Required starting at age 73 | None for original owner |
Early withdrawals before age 59½ | Taxes and additional 10% tax may apply | Taxes and additional 10% tax may apply to earnings |
Income limits for contributions | No income limits | Income limits |
How Do I Choose a Retirement Account?
The right account depends on your tax situation, retirement goals and personal preferences. Consider these factors:
- Tax benefits today vs. later: A traditional IRA may be a good fit if you expect to be in a lower tax bracket in retirement. A Roth IRA may make more sense if you expect your tax rate to be higher.
- Income eligibility: Roth IRA contributions may be limited at higher income levels. Review current IRS income limits to see whether you're eligible to contribute.
- Workplace retirement plans: You can contribute to an IRA even if you have a 401(k) or other employer-sponsored retirement plan. But a workplace plan may affect whether traditional IRA contributions are tax deductible.
It's normal to spend time comparing your options. No matter which account you choose, regularly contributing to your retirement savings could make a difference in the long term.
How Can KeyBank Help Me Choose an IRA?
KeyBank understands that choosing a retirement account involves balancing your current needs with your future goals. We can help you find an account that works best for you. You can learn more about available IRA options, compare account features and consider strategies that align with your retirement plan.
If you need guidance, schedule a Key Financial Wellness Review®. An experienced banker will meet with you to discuss your goals, weigh your options and identify next steps that may fit your financial situation.