Comparing Roth IRA Versus Traditional IRA

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Roth IRA versus Tradition IRA
Investing for your retirement is one of the most important things you can do for your future. And one of the best ways to do that is by investing in an Individual Retirement Account (IRA). There are two main types of IRAs which most people are eligible to contribute to – the Traditional IRA and…

Investing for your retirement is one of the most important things you can do for your future. And one of the best ways to do that is by investing in an Individual Retirement Account (IRA). There are two main types of IRAs which most people are eligible to contribute to – the Traditional IRA and the Roth IRA. They have the same contribution limits, but other than that, they are two very different retirement plans. Which is better?

Comparing Traditional IRAs and Roth IRAs

The most important difference between the Roth IRA and Traditional IRA is how the contributions and withdrawals are taxed.

Traditional IRA contributions are made with pre-tax income, meaning your contributions are made from income that has not yet been taxed. The benefit is that you get an immediate tax deduction (if you meet tax-deductible income levels, as mentioned below). Qualified withdrawals from your Traditional IRA are taxed at the time you make a withdrawal. The minimum age for withdrawals is age 59 ½.

Roth IRA Contributions are made with after-tax income. Qualified withdrawals are tax-free, as long as you are age 59 ½.

We’ll cover more details for each of the two retirement accounts in more detail in a moment.

But first, the following chart compares the two different IRAs and offers a side-by-side comparison for a better understanding of how these two plans work.

FeaturesTraditional IRARoth IRA
Who can contribute?You can contribute if you (or your spouse if filing jointly) have taxable compensation but not after you are age 70½ or older.You can contribute at any age if you (or your spouse if filing jointly) have taxable compensation and your modified adjusted gross income is below certain amounts (see IRA Contribution Limits).
Are my contributions deductible?You can deduct your contributions if you qualify.Your contributions aren’t deductible.
How much can I contribute?The most you can contribute to all of your Traditional and Roth IRAs is the smaller of:

- For 2019 & 2020, $6,000, or $7,000 if you’re age 50 or older by the end of the year; or your taxable compensation for the year.

There are income limits for tax deductions for Traditional IRAs and income limits for Roth IRA eligibility. See below for more information.
What is the deadline to make contributions?Your tax return filing deadline (not including extensions). For example, you can make 2019 IRA contributions until April 15, 2020.
When can I withdraw money?You can withdraw money anytime. However, there may be tax implications if you make withdrawals prior to age 59 ½.Roth IRA contributions can be withdrawn penalty-free at any time. However, there may be tax implications if you make withdrawals of the earnings prior to age 59 ½. See Roth IRA withdrawal rules for more information.
Do I have to take required minimum distributions?You must start taking distributions by April 1 following the year in which you turn age 70½ and by December 31 of later years.Not required if you are the original owner.
Are my withdrawals and distributions taxable?Any deductible contributions and earnings you withdraw or that are distributed from your traditional IRA are taxable. Also, if you are under age 59 ½ you may have to pay an additional 10% tax for early withdrawals unless you qualify for an exception.None if it’s a qualified distribution (or a withdrawal that is a qualified distribution). Otherwise, part of the distribution or withdrawal may be taxable. If you are under age 59 ½, you may also have to pay an additional 10% tax for early withdrawals unless you qualify for an exception.

What You Need to Know About Traditional IRAs

Roth IRA versus Tradition IRASimplified Definition: A Traditional IRA is a tax-deferred retirement vehicle. Contributions to a Traditional IRA plan may be tax deductible depending on the taxpayer’s income, tax filing status and other factors. Contributions to Traditional IRAs are made on a pre-tax basis, meaning the money is invested before it is taxed.

The benefit to investing pre-tax money is that it has the potential to lower your current tax bracket, and your money can grow tax-free until you withdraw it. Qualified withdrawals are treated as ordinary income and may be subject to income tax.

Traditional IRA Income Limits:

Everyone is eligible to contribute to a Traditional IRA, but not everyone will get the benefit of a tax deduction.

The ability to deduct your Traditional IRA contributions is based on your modified adjusted gross income, or MAGI.

Here is a list of the Traditional IRA deductibility limits (2019 limits listed).

2020 Traditional IRA Deduction Limits

If Your Filing Status Is...
And Your Modified AGI Is...Then You Can Take...
Single or Head of Household$65,000 or lessa full deduction up to the amount of your contribution limit.
more than $65,000 but less than $75,000a partial deduction.
$75,000 or moreno deduction.
Married Filing Jointly or Qualifying Widow(er)$104,000 or lessa full deduction up to the amount of your contribution limit.
more than $104,000 but less than $124,000a partial deduction.
$124,000 or moreno deduction.
Married Filing Separatelyless than $10,000a partial deduction.
$10,000 or moreno deduction.
If you file separately and did not live with your spouse at any time during the year, your IRA deduction is determined under the "Single" filing status.
  • Single, Head of Household, or Married Filing Separately can deduct the full amount of their contribution their MAGI is $65,000 or less. Deduction rates phase out beginning at a MAGI above $65,001, and end at $75,000. There is no tax deduction for those who have an income higher than $75,000.
  • Married Filing Jointly can make maximum Roth IRA contributions for an income of $104,000 or less. Roth IRA eligibility ends at $124,000. There is no deduction for taxpayers who have an AGI of greater than $124,000.

Note: Congress reviews retirement account contribution limits each year, and may increase limits based on several factors. The limits and MAGI levels in this article represent current deductibility limits.

Traditional IRA Withdrawals:

Traditional IRA holders are eligible to withdraw from their IRA at age 59½, at which point their withdrawals are taxed as ordinary income. There are stiff penalties for early withdrawal (with certain exceptions).

Required Minimum Distributions:

Owners of Traditional IRAs are subjected to Required Minimum Distributions, which begin at age 70½. This means Traditional IRA holders are required to make a minimum withdrawal every year regardless of whether or not they need the money.

Advantages of a Traditional IRA:

There are several advantages for investing in a Traditional IRA, and they primarily deal with taxes. The tax savings at the time of investment may be enough to decrease your taxable income to a lower tax bracket. Many retiree’s income is lower in retirement years, thus they may have a lower tax rate when they withdraw their funds. Depending on your income, you may be able to use a Traditional IRA to lower your tax bracket during your working years, and then withdraw your money in retirement in a low tax bracket.

Disadvantages of a Traditional IRA:

The minimum required distribution is a disadvantage because it requires IRA holders to withdraw a certain portion of their funds – whether they want to or not. It is also difficult to determine what your tax rate will be in retirement.

What You Need to Know About Roth IRAs

Simplified Definition: A Roth IRA is a tax-exempt retirement vehicle. Contributions to Roth IRAs are not tax deductible when they are made; however, qualified distributions made during retirement years are tax-free.

Roth IRA Income Limits:

Roth IRA eligibility is limited based on your Modified Adjusted Gross Income (MAGI). Here are the limits for 2020:

2020 Roth IRA Income Limits

If Your Filing Status Is...
And Your Modified AGI Is...Then You Can Contribute...
Married Filing Jointly or Qualifying Widow(er)$196,000 or lessup to the limit
more than $196,000 but less than $206,000a reduced amount
$206,000 or moreZero.
Married Filing Separately and You Lived with Your Spouse at Any Time During the Yearless than $10,000a reduced amount
$10,000 or moreZero.
Single, Head of Household, or Married Filing Separately and You Did Not Live with Your Spouse at Any Time During the Year$124,000 or lessno deduction.
more than $124,000 but less than $139,000a partial deduction.
$139,000 or moreZero.
  • Single, Head of Household, or Married Filing Separately can contribute the maximum if their MAGI is $124,000 or less. Contribution rates phase out beginning at a MAGI above $124,001, and end at $139,000.
  • Married Filing Jointly can make maximum Roth IRA contributions for an income of  $196,000 or less. Roth IRA eligibility ends at $206,000.

Roth IRA Withdrawals:

The minimum withdrawal age is 59 ½. When the money is withdrawn, none of it is taxed. The principal can also be withdrawn at any time without penalty, however, the earnings must remain in the IRA or they will be subject to taxes and penalties if withdrawn early. There are other rules that allow Roth IRA account owners to make withdrawals of the principal when certain criteria are met, or make withdrawals for expenses such as college or as a first-time home buyer.

Be certain you understand Roth IRA withdrawal rules before making a withdrawal because making a mistake can be extremely expensive if you end up owing penalties or fees.

It’s also a good idea to make sure early withdrawals won’t hurt your retirement chances. So be sure to research all options before pulling from your retirement account. Learn more about Roth IRA withdrawal rules here!

Required Minimum Distributions:

There is no Required Minimum Distribution for Roth IRA accounts. But there can be RMDs for Roth 401k plans and similar Roth retirement accounts. Be sure to understand the rules regarding your other retirement accounts. One common planning strategy is to roll Roth 401k funds into a Roth IRA at retirement to avoid the RMD requirement. As always, consult a financial planner or tax professional to make sure this is a good idea for your situation, and to avoid making any costly mistakes.

Advantages of a Roth IRA:

The biggest advantage of a Roth IRA is tax-free withdrawals on the principal and all earnings. The other advantage is the absence of minimum withdrawal requirements.

Disadvantages of a Roth IRA:

Not everyone qualifies for a Roth IRA because of the income limits. It is possible, however, to do a Roth IRA Conversion, which allows people to convert their Traditional IRA or another retirement fund into a Roth IRA. There are rules with Roth IRA Conversions, and the downside is you have to pay taxes on the amount you convert into a Roth IRA (unless you are converting from a non-deductible Traditional IRA). The tax rules can get a little involved, so it’s best to consult with a tax professional or read the full details before converting to a Roth IRA.

Which IRA is Better – Traditional or Roth?

Investing in IRAs is a great way to diversify your taxes in retirement years, and as you can see, there are distinct advantages to each type of IRA. If you are like me and have the option of funding a company 401(k) plan or another tax-deferred retirement plan, then a Roth IRA may be the way to go. This gives me investments that benefit me now by decreasing my taxable income with my 401(k) contributions but also investing in a Roth IRA, which will give me tax-free withdrawals in retirement. It is very difficult (or impossible) to predict our future tax brackets, so tax diversification is a strong benefit to retirement planning.

Where to Open a Traditional or Roth IRA

You can open an IRA in a variety of places, including banks, credit unions, brokerage firms, with an independent financial advisor, and more. In general, I believe it’s best to stick with a financial institution that focuses on investing, as many IRA accounts offered by banks focus on Certificates of Deposit, or have funds with high fees. In general, you will have more investment options with financial institutions that offer full investment services. We have a list of preferred locations to open an IRA.

I recommend investigating your personal situation and investing in whichever plan you decide is best for you. If you are eligible for both, you also have the option of splitting your investment to take advantage of tax benefits now, and in retirement.

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About Ryan Guina

Ryan Guina is the founder and editor of Cash Money Life. He is a writer, small business owner, and entrepreneur. He served over 6 years on active duty in the USAF and is a current member of the IL Air National Guard.

Ryan started Cash Money Life in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about military money topics and military and veterans benefits at The Military Wallet.

Ryan uses Personal Capital to track and manage his finances. Personal Capital is a free software program that allows him to track his net worth, balance his investment portfolio, track his income and expenses, and much more. You can open a free account here.

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  1. Adfecto says

    You covered using a Traditional IRA to lower your current tax bracket which is great, buy you kind of glazed over one of the biggest benefits of a Roth IRA.

    If you expect to be in a higher tax bracket in retirement than you are now the Roth IRA is a great investment vehicle. Your current bracket may be reduced by deducting mortgage interest, dependents, child care expenses, etc. If you are saving aggressively in your 20’s and 30’s with kids and a house it is very likely your taxes will be much higher when you are in retirement (15% now vs. 28-35% later). I certainly hope mine are! That doesn’t even factor in potential political and demographics changes that are likely to push tax rates up for everyone in the future.

    This is the primary reason why a Roth IRA is best for most people.

  2. Ryan says

    Adfecto, you’re correct, I skimmed right over that. The main reason was that I couldn’t word it as well as you just did. ;)The other reason – there is just no way to tell what anyone’s tax rates will be in retirement. That still doesn’t mean I should exclude the info though. That is the reason Roth IRAs are my preference as well. Thanks for the comment.

  3. Charles says


    I like the idea of tax diversification. If your reader does not have a corporate 401K but has business income, they should consider opening an individual or solo 401K. The individual has the same $15,500 or $20,500 limits (based on age) as a corporate 401(k) plus the ability to add a profit sharing contribution to the 401k. Also, amounts in 401k accounts from previous employers, SEPs, and other before-tax IRAs can be rolled into it. The only catch is that you have to be a solo employee (or the spouse). All of the major brokers and insurance companies have them. If you wish to have the full range of investments, a self-directed solo 401k from certain trust companies may fit the bill (this is what I have.)

  4. Ryan says

    Charles, Thanks for the info. This is something I have never dealt with before, but I am sure it might apply to some of my readers. This is the first year I will have some self-employment income, and I have considered opening a SEP IRA, or some other retirement fund to stash away some extra funds. I need to wait to determine how much income I will have after taxes and expenses are paid.

  5. Justin says

    I *just now* (15 minutes ago) opened up a roth SDIRA account. Can you let me in on what benefits and downfalls are of a Self Directed Roth IRA account versus a regular Roth IRA account?

  6. Tiffanie says

    You seem like you know your stuff. Maybe you can help me out. I ended up with a Roth IRA and a Traditional IRA (long story, huge mess…wrote about it on my blog) and I’m wondering if that’s a bad thing. I’m currently unemployed and the Traditional is being funded by the money I had from my previous employer whereas I just opened the Roth and plan on making small contributions even though I’m not working. Is this bad to have both? And what happens when I get a job with a company sponsored 401(k)? I’m lost!

  7. Ryan says

    Tiffanie, it’s nothing to worry about. The main difference between the two types of IRAs is when the money is taxed.

    Traditional IRAs are funded before the money is taxed from your paycheck and they are taxed when you withdraw funds.

    Roth IRAs are funded with money that has already been taxed from your paycheck and withdrawals are tax free.

    You can have both types of IRAs, but you can only contribute a combined $5,000 into both accounts per year (at least for 2008 max level; I think the limit increases next year).

    A 401(k) is an entirely different investment plan and is not affected by your IRAs, so you can have both.

  8. Tom Kurzenbaum says

    The taxing of IRA withdrawals,401k withdrawals is absolutely and utterly unfair during times of national emergency. I was totally wiped out after Hurricane Katria and now i find myself with a heavy tax burden. There were no alternatives and the last place to keep myself above water was to take MY OWN MONEY and use it. The new Obama administration should look at reforming this tax law. I shutter to think of the thousands of people using THEIR OWN MONEY(IRA, 401K’s)
    during this economic meltdown to keep themselves in their homes with food on the table, and then being kicked in the teeth my the IRS. Reform is needed NOW!

  9. Ryan says

    Hello Tom: I’m sorry to hear about your experiences with Hurricane Katrina a few years back and the difficulties you currently face. I understand your frustration, and while the 401k money and IRA money is yours, if is a Traditional version, it has never been taxed. People should be required to pay taxes on their income during times of crisis as well as good times. The government simply cannot afford to run without taking in taxes.

    As for changing this, I think it may make sense to remove the early withdrawal penalty, but not remove the taxes which had never been paid.

  10. Tom Kurzenbaum says

    Ryan: My ponit is simple;this round of foreclosures and human and family misery will be exasperated at the absolute worst time for everyone. Its tantamount to having Bank of America, AIG, and all the other corporate enities recieving tax payers money (not theirs as our Ira and 401K are) and being kicked in the teeth with a huge tax liablity. Would love to see the Congressional Budget Office’s numbers on how much actual revenue the treasury would be losing. I am sure the general economy could use the $$$ alot better than the US treasury. Remember the congress will be considering a stimulus package of 800B to 1 trillion dollars to get our economy going again. Probably talking about a drop in the bucket.

  11. El says

    I enjoyed your article. As to your reply to Tiffanie on contribution limits for 2008 & 2009, it’s $5,000 each year. I don’t know about 2010.

    On another topic, just a note on your word usage:
    “The principle can also be withdrawn”
    In dealing with money, you’re talking principal, not principle.

  12. george says

    Can I convert my standard IRA to a Roth IRA before 4-15-09, and use my unused 2008 tax decuctions to pay for taxes due on the conversion?

    Also, where is the easiest/best place to do the conversion?

    thanks, george

    • Ryan says

      George: To be honest, I am not sure if you can or not. I recommend speaking with a CPA or financial planner for more information on this question. I would hate to ster you in the wrong direction.

  13. Anita says

    Ryan, quick question. If I am withdrawing from my 401K employer plan and moving to a traditional IRA and that process takes about 10 days, but taxpreparer said i can claim the $5000 now on my 2008 Taxes, what if that money does not get to me by 4/15/09 from my employer plan. Do i think have to refile an amended tax return and remove it from 2008 or will it be okay as long as the process was started before 4/15/09?

    • Ryan says

      Anita: I’m sorry, I’m not qualified to answer that question. I recommend working with a CPA or other qualified tax professional. Best of luck!

  14. A Cast says

    Currently unemployed (laid off) I have a 401 k , my question is at the age of 60 should i consider rolling it over to an IRA? Traditional or Roth?


  15. Hojin says

    I’m seperating from the Army and I was wondering if TSP can be rolled over directly to roth IRA since one’s pre and other’s post-tax.

    • Ryan says

      Hojin, You can roll it into a Roth IRA, but you will first have to roll it into a Traditional IRA, then do a Roth IRA conversion. That will involve a little paperwork and paying taxes on the amount of money you roll into a Roth IRA. If you decide to go this route, I recommend having the financial institution assist you with the paperwork (most will do the paperwork for free).

      • Matthew says

        This information is incorrect. It’s possible to rollover TSP funds directly into a Roth IRA upon separation from the military. I did so when I separated ~June 2009. It requires a bit of paperwork from the TSP and from the bank where you hold the Roth IRA. I recommend visiting the TSP website and reading the FAQs about Roth IRAs for specific instructions.

        • Ryan says

          Thanks for the update, Matthew. At one point it was not possible to roll a TSP account directly into a Roth IRA. It is now possible to do so.

  16. Mike says

    Great info – I have a couple other questions…’s some background.

    I’m currently participating in (and maxing out my contributions in $$) into my existing employers 401k. I have a ROTH IRA open and want to continue to contribute there, and I have an OLD 401K, still in an ex-employers plan.

    What to do with the OLD 401k? Should I roll it into a traditonal IRA or my current employers plan? Advantages/Disadvantages? If this plan contains a high percentage of that companies stock (which has decreased significantly), should I wait until it comes back a bit (it’s showing signs) before rolling it over?

    For my ROTH IRA, I am approaching the cutoff limit based on me and my spouses combined salaries. I understand that you use an adjusted gross income to make that calcualtion – so is that basically our nets combined, minus what we contribute (pre-tax) into our 401k’s (and any other allowable deductions)? If I OVER contribute, what happens?


    • Ryan says

      Mike, This should help you with your decision on your old 401k: Deciding What to Do With Your 401(k ) When You Change Jobs.

      Regarding contributing too much to a Roth – There may be penalties involved if you contribute too much money and don’t fix the problem before the tax deadline, so I would consult an accountant or financial planner for more information on that one. Remember, you have until April 15 of the following year to contribute, so in the mean time, you may consider saving the amount you would normally contribute to a Roth in a high yield savings account. That way you are earning interest and can invest the full amount if you are eligible.

  17. Sandy says

    I am married but have filed and will file next year as married filing separately. I do not earn more than 95,000 but together with my husband we would be over the 150,000. Can I still open a Roth IRA under my name?
    I have one IRA account and another Roth IRA (with minimum amounts). I would like to consolidate them all into a Roth IRA in the same bank. Is this possible? If so, I would just go to the bank and ask them to do so?
    Thank you

    • Ryan says

      I’m not sure about the income situation when you file separately. But you should be able to consolidate your IRA accounts. Your bank should give you a simple form to fill out that will allow them to transfer your old IRAs into one account. You should be able to transfer the funds directly from one IRA to another, but if one of your old IRA accounts sends you a check when you close your account you will need to deposit it into an IRA immediately to avoid early withdrawal penalties.

  18. BioJoe says

    Hey Hey lots of good qeustions here. I will be jumpin in now and then. I have some knowledge on IRAs, 401ks, and some on prospectuses, mutual funds. To Tiffanie… can convert IRAs back and forth but there are some implications. I have to pull out my notes on the conversions. I remember one way was better than the other. You can also call any investment firm and they will tell you which is allowed and the adv/disadvantages plus you get the benefit of learning the invesment jargon, lol. Tip of the day/month or, cause I feel tippy!!!!……When rolling over a 401K (due to loss of job…etc) ALWAYS!! transfer those assest to the new institution/firm. NEVER have the check sent to you…trust me you will have more paperwork and headaches to deal with depending on which institution/firm and which idiot in the cubicle you get!!!

  19. TIFFANY says

    When I went to college we were told that the Roth IRA was the way to invest for college. My son is ten years old and I’d like to start a “college fund” now for him. Will his money be tied up until he’s 59 1/2 or is there even a penalty for early withdrawal?

  20. clara says

    I am not quite 59 1/2, and plan to retire at 62 or 63. I am trying to determine if my understanding is correct and which IRA I should choose. Am I correct that you have to leave your money in a Roth Ira for five years (from contribution) to be able to withdraw it (even partially) without penalty? If so, I don’t necessarily want that one. If I decide to go with a traditional IRA, I believe an earlier blogg said the benefit is that you would contribute tax free now, but how does that work…does your employer somehow get involved, or does the tax benefit come off at the time you calculate your taxes for April 15th…sorry, so uneducated on this…(I really hope the later, don’t want employer knowledge of what/how much I want to add to an IRA) as employer contributes to a (non-employee contributed) retirement plan. (Also, am I correct in thinking a traditional IRA, if you calculate the tax savings at the time you prepare your tax return, it has nothing to do with whether you itemize or not, right???). Thanks for educating me on these issues…

  21. eR1c says

    No one evers mention risk with any of these investments. Maybe it was mentioned yet I didn’t see it.

    I have 3 401k,s a mutual fund, (had a variable annuity) and owned stocks. I lost about 75% of all assets that were in any risk with the economic meltdown. Fortunately I keep about 70% of all my investments in zero risk accounts (i.e. CD’s and high yield money market accounts). Sure CD’s and such only offer 6% at best during good economy, yet I can’t tell you how many people I know had everything in 401k’s, IRA, and other “Retirement” accoutns only to lose nearly all of their savings when they needed it most (close to their retirements). Now they all either have to go back to work, work longer, or pray the economy has some significant upswing to they can recoup some of their serious loses.

    I’d recommend to young people to put a majority of thier savings into zero risk CD’s and traditional savings accounts that offer decent rates of return. Slow and steady savings beginning in your twenties w/ little risk will guarantee you money during retirment that won’t be taxes when you take it out.

    Just my 2 cents. You’ve got to ask your self, if you are you saving for retirement then your sure to get there if you live below your means and put money away every year for 30 or more years. 401ks, IRAs, mutual funds, etc .. they aren’t a guarantee now matter how much money you throw into them, -yet your savings account is!

    • Matthew says

      This advice is extremely impractical. When people are young is typically when they can accept maximum risk on their retirement savings. That is because they have a lot of time to allow market changes to correct themselves before they need that money for retirement. If younger people only put retirement money in places with zero risk (CDs, savings accounts, etc.), their money will fail to keep pace with inflation. Imagine putting $100 away for retirement at zero risk and having only $50 left when inflation is considered when you’re ready to retire.

      On the other hand, as you approach retirement age, you cannot afford nearly as much risk. You no longer have time to allow for market corrections. Therefore, as you approach retirement age, people should shift their retirement funds out of riskier accounts and into accounts with less risk (bonds, CDs, etc.). Even then, it’s a smart idea to keep at least a small percentage of your funds in accounts with higher risk in order to ensure your savings keep pace with inflation and last until you pass away. Remember, people are living longer and longer every day. No one wants to go back to work when they’re 90 because they ran out of retirement savings.

  22. Yasmine says

    Here’s an interesting twist I encountered this year doing my taxes-
    I have a traditional IRA and a 403b (non profit 401k). I contribute to both, but was trying to maximize my IRA as it has proven to be a better performer than the 403B. I got my contributions up to $4000 for 2009, and then got my taxes back from my accountant. He was only able to deduct $1040 from my taxes, with the remaining $2960 being listed on form 8066 and unable to be deducted from my taxes. Why? I earned over $55,000 last year. Turns out (as explained by my Vanguard folks) that I need to now save my taxes for the next 30 years as when I retire I will have a portion of my traditional IRA that has not been taxed (ala the deductible amount) and a portion that has been taxed (the part on the 8066). Vanguard tells me that the only way to know these amounts will be through my saved 8066 forms. Waaay too complicated for my little brain to hold onto. I hope to continue earning more through the next 30 years, so it’s unlikely I will avoid this. I am now in the process of recharacterizing that $2960 into a Roth IRA, and will advise my friends to only open Roth IRAs. This deductible limit would not apply if I did not have access to a 403b or 401k.

    • Ryan says

      Yasmine, The deduction limits certainly can make things interesting. Your best options are to either contribute to a Roth IRA (as you are converting your Traditional contributions), or contribute more toward your 403b. Either are fine options and offer benefits. It just depends whether you prefer your tax deduction now (then use 403b) or later (use the Roth IRA).

      Thanks for sharing!

  23. Marie Olsen says

    I only made $3,500 last years and see nowhere that says anything about a minimum amount affecting the $5,000 I could put into a Roth IRA. Can I put in the full $5,000, or even $6,000 mentioned?

    • Ryan says

      Marie, Based on my understanding, you need to have earned income to contribute to an IRA. So if you earned less than the maximum contribution, you can only contribute up to the amount you earned. An exception would be if your spouse had more earned income, then you could use that income toward your contributions. I recommend contacting a tax professional or the IRS for more specific information based on your exact situation.

  24. Jim Young says

    I work and make over th limits for a IRA. Have 401k at work and max it out.
    Want to open a IRA this year and then convert it to a roth. My wife is a stay at home mom. Can I open a combined IRA and put $5000 for me and $5000 for my wife so we have $10K in a IRA – then want to convert it to a Roth IRA. Main goal is to get $10K into a Roth. Can I do this again in 2011???



    • Ryan says

      Hi Jim, you should be able to do that. You can open a spousal IRA for your wife up to the limit, and you can do the conversions this year, and possibly next year. Just be sure you know the ins and outs of the conversion process and are aware of any taxes or other fees that may be required. I recommend speaking with a financial planner or tax professional about this to make sure you do the paperwork properly.

  25. Mark says


    I have two questions regarding Roth IRA’s. I don’t have that much extra cash, but I would like to start at least, and hope to contribute more each year. That is permissible, isn’t it?

    Second, I am trying to figure out my tax benefit for doing it now, before filing taxes and it seems because I am married filing jointly and our line 38 AGI is more that $55k…I can’t deduct anything? Could this be right? I hear so much every year about making sure to do this before April 15, and yet it seems most middle class folks like me can derive no benefit, at least with this years taxes. Please tell me I am missing something?

    • Ryan says


      Regarding Roth IRAs – yes, you can contribute as little as your IRA custodian will allow (some IRA custodians require a minimum investment to open an account, usually anywhere from $100 – $3,000, depending on the financial institution you use). You can make regular or irregular contributions at any time, so long as you don’t exceed the maximum contribution limit. You can also contribute to an IRA for the previous tax year up to that year’s tax filing deadline (April 15th). For example, this year you can contribute to a 2009 IRA until April 15. Once that deadline passes you can no longer make contributions for that tax year.

      Deductible IRAs have an income limit. In this case you would not be able to take a deduction on a Traditional IRA contribution, so you may be better off investing with a Roth IRA and receiving tax free withdrawals in retirement. It doesn’t help your tax situation now, but it will likely be better in your retirement years when you begin making withdrawals.

  26. Vanna says


    I want to know which IRA is better for my parents to invest in? My Mom will be 60 this July, she’s an Oregonian state’s employee. She has 401k at work, she plan to retire at 60. Currently, she has $8000 invested in Traditional IRA account at her credit union bank. My Dad is 61 and unemployed, not planning to return to the workforce due to his health. Currently, he has $5000 invested in the Roth IRA account at the bank. My parent’s income is $30700 for this year, they file jointly return. My question is should they continue to invest into their IRA account, if yes, which one is better for them Roth or Traditional? And at what amount?

    They also received a statement “2009 IRA Fair Market Valud and 2010 Required Minimum Distribution Statement” What is this and what should I do with it? Do they have to file tax or just keep it for their record? I’m doing their tax for them. Please help!!!!

    • Ryan says

      Hi Vanna, Your parents are near retirement age and this type of planning calls for specialized recommendations. They should speak with a certified financial professional regarding their situation and to help them determine if they can afford to retire.

      I do not have an answer regarding the tax situation either. I use an accountant for my taxes. You can try contacting a local accountant or using a tax software program for their taxes. Sorry I couldn’t be of more assistance.

  27. MARYSOL says

    hello ryan,
    I’ve been looking online to see whats the best thing for me to do as a retirement plan, or even investing my money, so i need your help or best advise. I am single 23 years old, i work 40 hours a week my company doesnt offer any 401(k) so ive been saving 10% of my paycheck every week but its just sitting in a savings account and i want to do something other than just have it sitting there so i dropped the 401(k) option since my company doesnt offer it and im confused with wich ROTH OR TRADITIONAL IRA TO PICK FROM?

  28. Greg says

    I have read the article on Roth IRA and Traditional IRA. Now my question is, my wife and I both work for the state of Texas, we’re both 38yrs old, which one would be better to invest in? I have a 401K plan. As long as I don’t dip in it to make sure the bills get paid. I have seen people I work with retire, but come back to work after a few months of retirement and double dip. Get a pay check and a retirement check. I don’t want to do that. When I retire, I want to retire and not worry about my bills getting paid.

    • Ryan says

      Greg, I recommend investing in the 401k first if you get a company match on your contributions – that way you get some free money. If you don’t get the company match, then I prefer contributing to a Roth IRA because it has several benefits Traditional IRAs and 401k plans don’t offer.

      With both plans you don’t want to make early withdrawals because they may expose you to very expensive penalties and fees. You can read more about it here: Early Withdrawal Penalties.

      If you feel like you are having trouble making ends meet, then try temporarily scaling back on your investment contributions or creating/reworking your budget until you free up some cash flow.

      Best of luck.

  29. Bob says

    Great article. I think I am too old for the Roth IRA but I do contribute to my company 401k but use the traditional. For all the younger people, I would
    suggest investing in ROTH.

    • Ryan says

      Bob, I don’t think you can really be too old for a Roth IRA. If you are eligible to make contributions, then you should go for it. Keep in mind they don’t have a minimum distribution agelimit like Traditional IRAs, which will allow you to shelter your money for a longer time period.

      • Ryan says

        Joe, the Roth can be a great deal for people of any age – but the reason many people recommend Roth IRAs for younger people is because they are generally in a lower tax bracket now, which means they won’t have to pay as much tax to take advantage of it (and their tax savings wouldn’t be as good with a Traditional IRA), and people are generally in higher tax brackets when they are older, as their earning power increases, meaning they pay more taxes to take advantage of a Roth IRA. That said, I can’t imagine tax brackets in the next 10, 20, or 30 years will be much lower than they are now, and if that is the case, a Roth IRA is probably best for anyone who is eligible to contribute to one.

        • John says

          I don’t understand why a young investor would focus on current tax brackets vs. future tax brackets when deciding between a Traditional or Roth IRA.

          Assume a 30 year old in a 25% tax bracket was going to invest $5000 in an IRA and leave it until they were 60. If they chose a Traditional IRA, they would save $1250 upfront. If they chose a Roth, they would have paid $1,667 in tax before having $5000 to invest.

          Assume the $5,000 accrues 8% interest annually. After 30 years, you would have $50,313. Even if you were in a 10% tax bracket when you were withdrawing the funds, with a Traditional IRA you’d be paying $5,000+ in tax. With a Roth, none of the gains would be taxed, and you’d have only paid the initial $1,667 in total.

          Am I missing something? Obviously as you get older it becomes a different story, as the principal will not have as long to accrue interest. But for a young investor who is thinking long term, I can’t see why you wouldn’t choose a Roth IRA. Thanks!

  30. Greg says

    The state don’t match our 401k plan but it matches our state retiremnet. We have both. so would this still apply with the Roth IRA. Also how do we go about finding out where to invest in the Roth IRA?

    • Ryan says

      Greg, you should sill be able to invest in a Roth IRA, so long as you meet the income requirements, and a Roth IRA is often a good investment option because of the tax benefits it offers.. Here is some information about where to open a Roth IRA.

  31. Daddy Paul says

    I have changed my mind on IRA’s. I was a big fan of Roths and am now leaning back to traditional IRA’s. I think the tax hikes of the future will come in the form of fees not income taxes.

  32. NeeNee M says

    At age 61 and income of about $80,000/yr (joint), would it be better for us to have a Roth IRA or a Traditional IRA in addition to our savings and other investments? Even though our taxes are about 25%, the future looks like taxes will be even higher as we try to recover as a nation economically. Any suggestion is appreciated. Also, can we do a 401K with the company (we own our own business) matching at this late date and have it be an advantage?

  33. Victoria says

    I am planning on opening a Roth IRA. I am 32 years old and currently making $48,000. If in the near future my salary is above the $95K, will I not be able to contribute anymore since my income is above the limitations? Please explain. Thank you!

    • Ryan says

      Victoria, if your AGI (adjusted gross income) exceeds the income limits, then no, you would no longer be able to contribute in that tax year. However, you would still be able to keep the money in your current Roth IRA. It’s also important to note that your AGI is calculated after your tax deductions, so if you contribute to a 401k plan, contribute to charity, have a mortgage deduction, or other tax deductions, you may fall within the limits to continue contributing to a Roth IRA.

  34. khimley says

    if you were to invest 3,500 in a traditional IRA and a Roth IRA after making adjustments for possible tax deductions, what would your net contribution be for both the traditional and Roth IRA??

  35. Bill Ryan says

    I have a client in his mid-50s. He has his own business, earns less than $100,000 a year and just recently began funding Roth IRAs for him and his wife. He owns his home free and clear but has little in savings–indeed his only savings is the newly created Roth IRAs. I told him that since he has little saved and his earnings will drop dramatically when he retires that he would be better off with a traditional IRA so he can take advantage of the tax deduction now. What is your view?

    Bill Ryan

    • Ryan Guina says

      Actually, I would take a step back and review his entire portfolio and financial situation, to include emergency fund, life insurance, and long term disability coverage. All of those are essential, especially for self-employed individuals who may have irregular income, and who won’t have employer sponsored insurance or other coverage to help with any emergencies that may arise. I would focus on those items before focusing on retirement savings.

      As for Traditional vs. Roth, your reasoning sounds good. If his income drops to next to nothing upon retirement, then he could possibly pay less in taxes later. The tax break could help him more now. I would put the numbers into a financial model with current income and tax rates, anticipated retirement savings and growth, anticipated retirement date, probable retirement income (social security benefits, any previous employer sponsored retirement plans or pensions, etc.), etc. That should give your client a good idea regarding which plan to choose.

  36. Free Money Minute says

    Nice summary of the differences in these accounts. I like the fact that you used the term tax diversification. I think this is key to your retirement strategy. You can use Roth funds (untaxed in retirement) to cover expenses to keep your income lower and in lower tax brackets.

  37. Renee says

    I have a Roth IRA and my employer just cancelled the companies 401k program so I rolled the 401k into a traditional IRA. I want to contribute the maximum amount for the year (5,500) but do not know how much to put into each account. I have around $50,000 in the traditional and around $4,000 in the Roth. Would it be better to split the amount between the two or put more in one vs. the other? Any advise would be greatly appreciated. I am 47 and want to make sure I have enough money saved when I go to retire.

    • Ryan Guina says

      Renee, there are several key differences which will help you make the decision: taxes (both short term and long term), flexibility with investments and withdrawals of the contributions, and Required Minimum Distributions.

      If you want a tax deduction now, then contribute to the Traditional IRA (if you meet income levels for a tax deduction). If you don’t mind paying the taxes on your income now and want the option and flexibility of no taxes or Required Minimum Distributions later, then go with the Roth IRA.

      In general, Roth IRAs have more long-term flexibility for most investors because they don’t require you to make minimum withdrawals at a certain age. You also have the ability to withdraw contributions (not earnings) from a Roth IRA without incurring any penalties or fees. You can’t do that with a Traditional IRA.

      My personal preference is to invest with ROTH IRAs, because they offer more long-term flexibility and tax diversification. But if you prefer to invest with Traditional IRAs, then go there. Don’t let the current balance of one portfolio make your decision for you. If you continue to make Roth IRA contributions, then your Roth portfolio will eventually exceed your Traditional IRA portfolio, and you will still have access to both for your retirement funds.

  38. carol says

    I want to open one of those account, but I want to know if I can make a monthly contribute from my pay check before tax, which account can I do that with. if possible

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