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Be Wise With Money

Which IRA Is Right for You?

Learn whether a Roth or traditional IRA is best for the life stage you’re in.

woman using calculator


An individual retirement account, or IRA, is a versatile long-term savings tool—one you may want to consider. But before you open an account, you need to pick between a traditional and Roth IRA. To make that decision, learn the difference between the two and then look at the pros and cons of each option during four life stages.

The Essentials

You can contribute a maximum of $5,500 a year to an IRA if you’re under age 50. But that’s the total contribution allowed no matter how many IRA accounts you own. If you’re age 50 or older, the maximum contribution is $6,500 a year.

The major difference between the two types of IRAs is how they’re taxed.

  • Traditional IRA: Your contributions may be tax-deductible. If deductible, you essentially subtract your contribution from the amount of income you claim on your tax return. If you or your spouse are covered by an employer retirement plan, your Modified Adjusted Gross Income must be under the required IRS threshold for it to be deductible.* You can start taking withdrawals without any penalties at age 59½. You then pay taxes on your withdrawals.
  • Roth IRA: Your contributions are not tax-deductible. Your contributions can be withdrawn at any time. In order to have a “qualified distribution” of earnings (which means the earnings are tax- and penalty-free), the account has to have been open for five years and you need to be either age 59½ or older, disabled, making a first-time home purchase ($10,000 lifetime limit) or paying your beneficiary after your death.

The Stages

At any of these life stages, you should also consider your current tax situation and potential future tax situation, and talk to your financial representative.

Stage 1: Starting Your Career

  • Popular Pick: Roth IRA
  • Reason: Taxes

“When you’re just starting out, you may be in a lower income bracket and lower tax bracket,” says William O’Doherty, a Thrivent Financial representative in Montvale, New Jersey. So you’ll pay lower taxes on your Roth IRA contributions. Withdrawals of your earnings are tax-free (assuming the account has been open for five years) after age 59½—an age when you’ll likely be in a higher tax bracket.

Stage 2: Family Life

  • Popular Pick: Roth IRA
  • Reason: Flexibility

If you get married and have children, you’ll have other major expenses. A Roth IRA gives you flexibility to take money out without tax or penalties to pay those expenses as long as you’re only using the contribution amount and not any of the account’s earnings, or growth, O’Doherty says.

You can withdraw some Roth IRA earnings without a penalty if you’re buying your first home or paying for qualified college expenses. But the earnings could be taxable, depending on the reason for the distribution. There are restrictions, however. Talk to your financial representative to learn if this is an option for you.

Stage 3: Height of Your Career

  • Popular Pick: Close Call
  • Reason: Income Limits

A traditional IRA has income limits regarding deductibility, if you also have a retirement plan such as a 401(k) through your employer. To deduct the maximum $5,500 contribution ($6,500 if 50+), the Modified Adjusted Gross Income limit in 2017 is:

  • $62,000 for a single person
  • $99,000 for a married couple filing taxes jointly

If neither you nor your spouse are active participants through your employers’ retirement plans, there’s no income limit for deducting your traditional IRA contributions.

Your salary at the height of your career might put you over the adjusted gross income limits to contribute to a Roth IRA. In 2017, to make the maximum contribution to a Roth IRA, the Modified Adjusted Gross Income limits are:**

  • $118,000 for a single person
  • $186,000 for a married couple filing taxes jointly

Stage 4: Retirement

  • Popular Pick: Roth IRA
  • Reason: Flexibility

With a traditional IRA, you must start withdrawing funds at age 70½, and you can no longer add more money to your account. A Roth IRA does not limit you making contributions as long as you or your spouse have earned income and meet the MAGI thresholds. You can keep growing your Roth IRA nest egg for you—and your heirs. After your death, if your Roth IRA has been open for at least five years, it will pass tax-free to your beneficiary. Although you are not subject to required minimum distribution (RMD) rules, your beneficiary is.  

How Might Your Savings Grow?

Here’s a hypothetical example of how your money might grow after contributing for 20 years to a tax-deductible traditional IRA, Roth IRA and a nondeductible savings account. (We’ve run the numbers for an individual who is contributing $5,500 annually, receiving an 8 percent annual rate of return and is in the 25 percent tax bracket at the time of withdrawal.) These figures show what stays in your pocket after all taxes have been paid.

Traditional Tax-Deductible IRA1:

$257,485

Roth IRA:

$271,826

Nondeductible Savings Account:

$214,460

Read more about IRAs and other ways to save for retirement.

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