Deciding Between a Roth vs. Traditional IRA

You might think the choice between a Roth and a traditional individual retirement account comes down to taxes. While taxes play a role in this decision, investors shouldn’t overlook other factors, such as income flexibility, withdrawal strategies and legacy planning.

Here’s what to know when deciding which type of account is most suitable for investing your next retirement dollar.

[READ: Retirement Accounts You Should Consider.]

Traditional IRA vs. Roth IRA

There are some key differences between the two types of IRAs. Before you dig too deeply into the question of where to make your retirement contributions, be sure to fully understand the rules of each.

How Do Tax Brackets Influence IRA Choice?

Future tax rates are uncertain, which means the choice between a Roth or a traditional IRA is one that involves both science and art.

Having a window into the future would help. “If that’s not an option, a careful consideration of current income, expected future earnings and expected expenses in retirement is vital,” said Brendan Fuller, director of financial planning at Tomkins Financial Advisors in Wyomissing, Pennsylvania, in an email. “For most, if they are currently in peak earning years and expect their taxable income to be less in retirement, a traditional IRA could make sense.”

A contribution to a traditional IRA generates a tax deduction in the year it is made in exchange for a taxable distribution in retirement. A Roth contribution, meanwhile, is made after taxes, and withdrawals are tax-free in retirement.

“The latter scenario can be compelling for those who may not see themselves in a lower tax bracket in the future, but instead may find themselves in a similar or higher bracket,” Fuller said.

However, he noted that because retirement can last as long as 30 years, the tax environment could change dramatically from what it is today. Investors saving in a low or relatively low tax-rate environment may find themselves in a higher marginal tax bracket in retirement, even with the same income level.

“At the end of the day, like an investment allocation, diversification is the name of the game. Having a mix of different account types with varying tax treatment gives options in the future,” Fuller said.

[Related:Tax Changes You Can Expect in Retirement]

Withdrawal Differences Between Roth and Traditional IRAs

When it comes time to pull the money out of a retirement account, understand how a Roth and a traditional IRA differ beyond tax treatment.

Traditional IRAs are similar to a locked vault that the owner can’t touch without penalties until age 59 1/2, said Tj Binkowski, owner of Narrow Road Financial Planning in Adams, Tennessee, in an email.

Roth IRAs are more flexible, he added, as the original deposits can be withdrawn at any time without penalty or tax consequences. It’s a different story for earnings, though.

“You get the same penalty as a traditional IRA for the money you’ve gained from investing,” Binkowski said.

Which IRA Is Better for Estate Planning?

Investors older than 59 1/2 can withdraw money tax-free at any time or opt not to withdraw it at all, allowing the money to grow for their heirs to withdraw tax-free. That’s an attractive feature when it comes to estate planning.

“If you’ve ever seen someone inherit a $500,000 IRA and have to pay ordinary income taxes on that while they’re working, you know how much of a game-changer this can be,” Binkowski said.

The rules for inherited Roth IRAs vary depending on the beneficiary. Non-spouse beneficiaries typically must make all withdrawals from the inherited Roth by the end of the 10th year after the account owner’s death. However, there’s no requirement to take annual required minimum distributions.

“Even though heirs have to take distributions within 10 years, they can let the Roth IRA keep growing during that time without worrying about taxes,” said Laura Mattia, senior vice president and financial advisor at Wealth Enhancement Group in Sarasota, Florida, in an email.

“This flexibility is great, especially if your heirs are high earners themselves, as inheriting a traditional IRA might not be as beneficial for them,” she said.

If you inherit your spouse’s Roth IRA, you can assume ownership and treat it as your own.

You Don’t Have to Choose One or the Other

The upfront tax benefit of a traditional IRA may not be as great as it seems, under certain circumstances. Sure, the tax break now sounds good, but eventually you’ll have to pay the piper, and you don’t know what tax rates or your bracket will be when that day arrives.

“However, that doesn’t mean a Roth is the right answer since everyone’s situation is unique,” said Carl Holubowich, a principal at Armstrong, Fleming & Moore in the District of Columbia, in an email.

It’s also important to note that it isn’t a binary choice, he added, as investors can split their contribution between a Roth and traditional IRA any way they like up to the total maximum allowable amount. The same goes for retirement plans like 401(k)s that offer a Roth option.

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Deciding Between a Roth vs. Traditional IRA originally appeared on usnews.com

Update 05/06/25: This story was published at an earlier date and has been updated with new information.

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