Should I contribute to a Roth IRA or a traditional IRA?

You may have heard that you should consider contributing to a Roth IRA for your retirement, a future home purchase or even your children’s education. That sounds great – except you’re not completely sure what a Roth IRA is, how it differs from a traditional IRA or whether you should have one, the other or both.

Understanding IRA differences

A traditional IRA is simply a tax-deferred individual retirement savings account.  Your traditional IRA can include a variety of investments, including stocks, CDs, bonds, mutual funds and money market funds.  

Your contributions may be tax-deductible, based on income requirements, and you can start taking out money (which is taxed as income) when you are 59 and a half years old.

A traditional IRA is available to anyone, and anyone can contribute up to $5,500 a year. Those 50  years old or older can contribute an extra $1,000.

A Roth IRA is also an individual retirement savings account with one very special twist—your income is tax-free.  You pay into the Roth IRA with your own, after-tax income, and when retirement age comes—59 and a half or older—you can start collecting that money without taxes.

“Roth IRAs make the most sense if you expect your tax rate to be higher during retirement than your current rate,” financial expert Matthew Malone writes.  “That makes Roth IRAs ideal savings vehicles for young, lower-income workers who won’t miss the upfront tax deduction and who will benefit from decades of tax-free, compounded growth.  Roth IRAs also appeal to anyone who wants to minimize their tax bite in retirement as well as older, wealthier taxpayers who want to leave assets to theirs tax-free.”

So what’s the catch?

Income limits, for one, and contribution limits. If you file taxes as a single head of household and your gross adjusted income is under $114,000, you can contribute up to $5,500 (or $6,500, depending on your age) to a Roth IRA – just like a traditional IRA.

Married couples who file a joint tax return can also contribute $5,500 annually to a Roth IRA if their combined gross adjusted income is $181,000 or less.

So which one should I have?

Do you plan on being in a higher income bracket when you retire? If you’re younger, the answer is probably (hopefully!) yes – and a Roth IRA makes more sense for you. Roth IRAs also allow you to withdraw money penalty-free for approved expenditures like home purchases, education and emergencies while a traditional IRA will ding you 10 percent.

If you’re looking at retirement in the near future and have no plans to pull money out of the account before the age of 59 and a half, however, you may prefer the tax-deferred growth of the traditional IRA.  Additionally, if you don’t meet the Roth IRA income requirements, you will need to take the traditional IRA road, regardless.

The IRS notes that your total IRA contributions per year are capped at $5,500 – but that does not mean you must choose between the traditional and Roth IRAs. You can, if you’d like, choose both.

“Since projecting the future is always uncertain,” Joanna D. Pratt, CFA, of NerdWallet.com writes, “some people choose the perfectly valid strategy of diversifying their tax exposure by contributing to a combination of Roth and traditional accounts.”


Let’s talk about your future. For a no-obligation consultation, visit our Investments page or call Northwest Investment Management at 1-877-300-3454.