One of the most common questions clients ask is, “What’s better, a traditional IRA or a Roth IRA?” While there are pros and cons to both types of accounts, the one most advantageous to you will depend on your financial situation and future goals. 

The Basics

Traditional IRARoth IRA
Contribution TypeContributions are made on a pre-tax basis, which reduces the taxpayer’s taxable income in the year contributions are made. Contributions are made on an after-tax basis, which provides no immediate tax benefit. 
EligibilityAnyone of any age with earned income can contribute.Higher-income earners are phased out from contributing. 
Tax-advantaged GrowthTax-deferred growth – No federal taxes are due until distributions are taken. Tax-free growth – No federal taxes are due as long as the account has been open for five years and the account holder has reached age 59 ½.
DistributionsDistributions are taxed as ordinary income. Contributions can be withdrawn at any time with no taxes or penalties. Qualified withdrawals (those made after age 59 ½ and after the account has been open for at least five years) are tax-free. 
Early Withdrawal PenaltiesDistributions before age 59 ½ may be subject to a 10% early withdrawal penalty and are taxed as ordinary income. Distributions of money contributed can be taken tax-free. Investment growth may be subject to a 10%  early withdrawal penalty if taken before age 59 ½ or if the account has been open for less than five years.
Required Minimum Distributions (RMDs)RMDs must begin once the investor reaches age 72.No RMDs are required for the account owner’s lifetime. (Account beneficiaries of inherited Roth IRAs may be subject to RMDs.)
Annual Contribution Limits$6,000 for those under age 50, with an additional $1,000 catch-up contribution permitted for those 50+.

What type of IRA is ultimately better?

 Modified Adjusted Gross Income (MAGI): In 2022, if your MAGI is greater than $144,000 as a single filer or $214,000 married filing jointly, you are not eligible to contribute to a Roth IRA. Contributions are gradually phased out for those with MAGI between $129,000 and $144,000 for single filers or $204,000 to $214,000 for married filing jointly. This means that contributions to a traditional IRA are your best and only option. 

Current and Future Tax Brackets: The rule is if you expect to fall into a lower tax bracket in retirement, you may want to make pre-tax contributions to a traditional IRA to lower your current (higher) income. If you expect to fall into a higher tax bracket in retirement, contribute to a Roth IRA to enjoy tax-free retirement income. 

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