Traditional IRA or Roth IRA: Which Is the Right One For You?

A traditional IRA and a Roth IRA both offer a secure and profitable way to plan for retirement, but which plan is right for you depends on various factors, including your age, individual needs and financial situation.

The answer to the question of whether you expect to pay more in taxes now or later will likely determine which plan suits you best. A traditional IRA provides a tax deduction on the contributed amount, which reduces your reported income for tax purposes. Your money grows tax-deferred, and taxes are collected once you start withdrawing money.

A Roth IRA works the opposite way, as funds are taxed as you make contributions. The cash still grows tax-free, but isn't taxed when you begin taking distributions upon retirement, according to Betterment LLC.

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Contribution limits are same for both types of IRAs, but a traditional IRA doesn't allow participant contributions for the year you turn age 70 and a half and beyond. A Roth IRA places no age restrictions, according to Investopedia.

Another factor that bears consideration is your overall income. If you earn more than a certain amount, you may not be eligible to contribute to a Roth IRA. Your Roth IRA contribution limit may also be lowered if your income falls within a certain range.

Investopedia suggests consulting with a tax advisor to figure out how much you can give to a Roth IRA. A Traditional IRA doesn't cap contributions at a certain income level.

Once you reach retirement age, if you want funds on an as needed basis, perhaps a Roth IRA is the way to go. A traditional IRA requires retirees to take minimum distributions each year by April 1 beginning the year after you turn 70 and a half. These distributions lower your IRA balance and are accounted for as income, regardless of whether you need the money.

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Additionally, the distributed amount may open to early-penalties if it's withdrawn before age 59 and a half.

As for the Roth IRA, distributions are tax and penalty free if at least five years has passed since your first Roth was funded, and one of the following conditions also applies:

1. You are 59 and a half.
2. You are disabled.
3. Your beneficiary receives the distribution upon your death.
4. The amount is used to purchase a first home.

It's also possible to split contributions between the IRAs, allowing you to enjoy the benefits of each. Before doing this, consider extra costs, such as maintenance and administrative fees, as well as the short- and long-term benefits of each.

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