Supercharge your savings with a traditional or Roth IRA

When it comes to saving for retirement, the sooner you get started, the better. Whether you plan to travel, pursue new hobbies or spend more time with loved ones, you don’t want to exit the workforce only to realize you don’t have enough to comfortably support the lifestyle you spent decades working toward.

Individual retirement accounts, or IRAs, can bolster your current savings with earnings that compound over time and tax advantages you can leverage now or in the future. Traditional and Roth are two of the most common types of IRAs. Here, learn what differentiates them so you can determine which may be best for you.

We'll cover:

• What is a traditional and Roth IRA?
• How IRA contributions work (limits and deadlines)
• Who is eligible to contribute to a traditional or Roth IRA
• How the tax advantage differs by type of IRA
• Withdrawal rules for traditional and Roth IRAs
• Traditional vs Roth IRA at a glance
• Can you contribute to both a traditional & a Roth IRA?
• Which IRA is right for you?

A traditional IRA is a financial tool that allows you to save for retirement with pre-tax dollars. The money grows tax-deferred over time. And you will defer paying taxes until you withdraw funds. The benefit of tax-deferral is that it gives your money the potential to grow and compound over a longer period of time.

A Roth IRA is also a retirement savings tool, but instead of contributions being made with pre-tax dollars, they are made with dollars you’ve already paid taxes on. Qualified withdrawals/distributions of earnings are then tax-free in the future as long as your Roth IRA is at least five years old and meets one of the following requirements:

• You are at least age 59½.
• You are disabled.
• You are purchasing your first home ($10,000 lifetime maximum).
• The money is being paid to a beneficiary.
  

In order to contribute to an IRA, you and/or your spouse must have earned income in the form of wages, salaries or tips from working. Income from real estate rentals, interest, dividends and other types of passive income don’t count as taxable compensation.

Both traditional and Roth IRAs have a combined contribution limit of $6,500 for 2023 or $7,000 for 2024. If you’re 50 or older by the end of the year, you’re allowed an additional “catch-up” contribution of $1,000. This limit applies to individuals, so if you’re married filing jointly, both you and your spouse can contribute the maximum amount.

Rollover funds from another type of retirement account into an IRA don’t count toward the annual contribution limit.

The deadline to contribute to a traditional or a Roth IRA is typically April 15 of the following tax year. (If April 15 falls on a weekend or holiday, the deadline typically shifts to the following business day.)

If you’ve exceeded your IRA contribution limit, you must withdraw excess funds by the tax filing deadline plus extensions to avoid a 6% penalty.

There are different eligibility requirements for traditional and Roth IRAs.

Any individual with earned income—or a spouse who has taxable compensation if you file jointly—can contribute to a traditional IRA.

You must also have earned income to contribute to a Roth IRA. In addition, there are income limits to participate. Depending on your modified adjusted gross income (MAGI)—AGI plus certain deductions and excluded income—and filing status, you only may be eligible to contribute a reduced amount to a Roth IRA, or not be allowed to contribute at all.

• If you make less than the MAGI range listed, you can contribute the full amount to a Roth IRA.
• If you make between the maximum MAGI listed, you can contribute a reduced amount to a Roth IRA.
• If you make equal to or more than the maximum limit listed, you can’t contribute anything to a Roth IRA.

No matter which type of IRA you choose, you’re putting the power of time to work for your retirement assets. Delaying taxes gives your savings the opportunity for a powerful boost through compounded growth.

The tax advantages for traditional IRAs come at the point of contribution and during the tax-deferred growth period. Contributions to a traditional IRA may be fully or partially tax-deductible if you and/or your spouse aren’t enrolled in an employer-sponsored retirement plan like a 401(k)—or you are, but your MAGI falls below certain thresholds.

• If you make less than the MAGI range listed, a full deduction is available.
• If you make between the MAGI listed, a partial deduction is available.
• If you make equal to or more than the maximum MAGI listed, no deduction is available.

The tax advantages for Roth IRAs come both during the tax-deferred growth period and at the point of withdrawal. Contributions to a Roth IRA always are made with after-tax dollars, meaning withdrawals on contributions can be taken any time for any reason and earnings are tax-free as long as they meet a qualified distribution event. There are no tax deductions for Roth IRA contributions.

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Creating a Roth IRA can make a big difference in your retirement savings. All future earnings are sheltered from taxes under current tax laws. If you meet a qualifying distribution event, the Roth IRA can provide truly tax-free growth potential.

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Withdrawal rules differ between traditional and Roth IRAs.

• Traditional IRA: Contributions and earnings are taxed at your regular income tax rate when withdrawn but are penalty-free after age 59½. If you choose to withdraw the money early, it’s subject to a 10% penalty unless you qualify for an exception.

• Roth IRA: Contributions can come out at any time without taxes or penalties. Earnings can be withdrawn tax- and penalty-free for qualified distributions, but non-qualified withdrawals may result in taxes and/or penalties.
  

Traditional IRAs are subject to RMDs, an amount you’re mandated to withdraw from the account once you reach a certain age:

• If you turn 73 before 2033, your RMD age is 73.
• If you turn 74 after 2032, you start taking RMDs at 75.

RMDs—calculated by taking your previous year’s IRA balance and dividing it by your age-dependent life expectancy set by the IRS—can be used however you’d like, whether it be retirement, experiences or travel, investments, insurance premiums or gifts to heirs.

Roth IRAs do not have RMDs for the IRA owner; Roth IRA beneficiaries will be subject to distribution rules.

Roth IRAs have a five-year rule that dictates when taxes and/or penalties will be applied to withdrawals on earnings:

• Withdrawals: If you withdraw Roth IRA earnings from your account within five years of your first contribution, you have to pay taxes (and potentially a penalty) on your earnings.

• Conversions: If you convert a different type of retirement account to a Roth IRA and you withdraw your conversion amount within five years or age 59½ (whichever is earlier), the 10% penalty will apply unless you meet a penalty exception. If you’re at least 59½ (which is a penalty exception), you don’t have to wait five years to withdraw the conversion amount penalty-free, but would have to wait to withdraw the earnings tax-free.

• Inheritances: If you inherit a Roth IRA, you’ll owe taxes on the earnings you withdraw unless it’s been at least five years since the account owner’s first contribution or conversation to the Roth account.
  

Yes, as long as you meet the eligibility requirements, you can fund both a traditional and a Roth IRA, but your total contribution limit across those accounts cannot exceed the annual contribution limit.

A traditional IRA might be right for you if:

• You currently have earned income.
• You think you’ll be in a lower tax bracket in retirement.
• You would benefit from a potential immediate federal income tax deduction.
• You don’t think you’ll need to take money out of the account until retirement.
• You plan to start withdrawing your savings between the ages of 59½ and 73.

 A Roth IRA might be right for you if:

• You currently have earned income.
• You have a MAGI within the IRS thresholds.
• You think you’ll be in a higher tax bracket in retirement.
• You would benefit from federal tax-free qualified distributions in the future.
• You want the flexibility to take out money you’ve contributed before age 59½ without penalties.
• You want the option to let your money grow as long as you choose, without being required to start withdrawing it at a certain age.

Connect with a Thrivent financial advisor to discuss which type of IRA may be best for your financial needs and retirement planning.