Retirement · February 25, 2021

Tax Benefits of Roth Versus Traditional IRA Plans When Funding Your Future

Individual retirement accounts, or IRAs, are a great way to grow the wealth you need to enjoy the years after you retire. But how do you know which type of retirement account is right for you?

Comparing the tax benefits of a Roth to a traditional IRA is an important step in choosing your plan. If you know how each type will impact your tax situation, you'll be better prepared to confidently select the account that makes sense for your specific needs.

The big picture

The differences between Roth and traditional IRAs are mostly found in the rules on early withdrawal, income eligibility, contributions and distribution requirements in retirement.

For example, while you won't be eligible for a Roth IRA once you reach a certain income level, you can still contribute to a traditional IRA with any level of income. And although the traditional IRA has a required minimum distribution starting at age 72, you can continue to contribute to a Roth IRA as long as you meet eligibility requirements.

The main difference we'll focus on is how and when your money is taxed in each of these types of accounts, because this can have a big impact on your overall retirement savings.

Tax implications

Both Roth and traditional IRAs are retirement plans that come with tax benefits. With a Roth IRA, you pay taxes upfront by contributing to the account using after-tax dollars. The money you invest grows tax-free, and you're not taxed on the withdrawals.

With a traditional IRA, you receive the tax benefit upfront with deductions on your contributions, up to a certain income level. The money you invest grows tax-free, but your distributions in retirement are taxed as income.

A good rule of thumb is to choose the account type with rules that will result in you paying the least in taxes. This means considering whether or not your tax rate is going to be higher now or in retirement, because it might be better for you to have the tax benefit come during your highest-earning years.

How life events can impact your choice

Because of their different advantages, your life situation may impact whether you choose a Roth or traditional IRA. For starters, moving into a higher income tax bracket—whether on your own or because your household income increases due to getting married—could limit your eligibility to contribute towards a Roth IRA.

If you have children and plan to pass on wealth to them, a Roth IRA might be ideal. It lets you continue to make contributions that will grow tax-free at any age, as long as you continue to meet eligibility requirements.

What age you plan to start using your retirement funds also matters when deciding which account to open. A traditional IRA comes with penalties for early withdrawals, while a Roth IRA allows you to withdraw contributions you've made penalty-free at any age.

Choosing the right type of retirement account can help you grow your money for the future you want. Knowing how tax implications and your life circumstances impact the benefits of a Roth versus a traditional IRA will help you move forward with the best plan for you.


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This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.