COLUMN: Roth versus Traditional IRA: Which is Better?

An Individual Retirement Account (IRA) comes in two different flavors: traditional and Roth. Do you know which is better for your financial situation?

While you can contribute up to $7,000 ($8,000 if age 50 or over) in 2024 with either option, you’ll have to dig a little deeper to uncover which one may be the better option for you.

A Traditional IRA is an individual savings account that allows you to contribute money for your retirement. Depending on your income level, you may deduct the contributions from your taxable income. Any earnings made in a Traditional IRA account remain tax-deferred until the money is withdrawn from the account.

After the account holder reaches age 73, you may no longer make contributions into your Traditional IRA and minimum required distributions must be taken from the account each year. Anyone with earned income can create a Traditional IRA, but there are income limits to the amount you can contribute to your IRA in pre-tax dollars.

A Roth IRA is an individual retirement account that allows you to contribute income that has already been taxed (after-tax dollars). Withdrawals of earnings on contributions from Roth IRA accounts are federal income tax-free so long as a 5-year holding period has been met and the account holder is at least 59 1/2 years old, disabled, or deceased.

Withdrawals of contributions are always tax-free under current law since you already paid the tax on the contributions. There are no required minimum distributions nor are there age limits for contributions. In 2024, individuals who earn more than $161,000, and married joint filers who earn more than $240,000 are ineligible to contribute to a Roth IRA.

Which is better?

* Traditional IRA contributions that qualify for pre-tax treatment will allow a larger beginning investment to compound over time versus a Roth IRA.

* Roth IRA contributions, though smaller because of tax treatment, could create earnings that are never taxed.

* Roth IRA accounts have more flexible contribution and withdrawal rules.

So the answer is…it depends. If you think tax rates will be significantly higher when you withdraw your retirement savings, then think seriously about a Roth IRA. This is the case in 2026 when temporary tax laws are scheduled to expire and the maximum tax rate returns to 39.5% (currently 37%).

If you think your retirement account investments will perform well, then perhaps the earnings growth in a Traditional IRA will more than pay for the additional tax at time of withdrawal.

One of my primary objectives is to help you achieve your financial goals through a holistic approach that is tax-efficient in my wealth management and tax resolution practice. For more information, visit www.fredtfoxiii.com.