Roth IRAs vs. Traditional IRAs: A Comparison of the Benefits and the Differences

If you’re looking into retirement plans, you’re probably familiar with traditional IRAs. You may have heard about Roth IRAs, too. But when considering Roth IRAs vs. traditional IRAs, do you know the differences between the plans? Both have some of the same attributes, but the differences lie in tax treatment of contributions and distributions. This article compares the two plans to help you decide which best suits your retirement planning needs.

Roth IRAs vs. Traditional IRAs at a Glance

Roth IRAs and traditional IRAs are alike in a few ways:

    • Contribution limits to both plans are the same: For 2024, the contribution A calculator with a note pad that says Roth IRAs vs traditional IRAs on a desk.limit is $7,000 with an extra $1,000 if you’re 50 or older.
    • You can make contributions to either plan by April 15 of the following year to count towards the previous year’s income tax liability. (The deadline to file your 2024 taxes is April 15, 2025).
    • You must have earned income in order to contribute to either account.
    • Both offer tax-sheltered earnings on investments.
    • You can contribute to either account after you reach retirement age provided you still work and have earned income.
    • Either account can be self-directed to invest in alternative assets like real estate, private equity, private lending, and more.

Features of Traditional IRAs

    • Contributions are tax deductible if you meet IRS income requirements.
    • Earnings in the account grow tax deferred.
    • Distributions of contributions and earnings are taxed as ordinary income in retirement.
    • You must begin taking required minimum distributions (RMDs) at age 72 if you turned 70 ½ after December 31, 2019. But the SECURE Act 2.0 extended that age to 73 for those who turn 73 in 2023 or later.
    • Early withdrawals before you reach age 59 ½ incur a 10 percent penalty and tax.
    • There are no income limitations for making annual contributions to this account.

Features of Roth IRAs

    • Contributions are not tax deductible.
    • Distributions of contributions are earnings in the account are tax-free in retirement.
    • There are no required distributions at any age, unlike with traditional IRAs.
    • You can pass a Roth IRA to your heirs so they can enjoy tax-free distributions, as well.
    • If you are over 59 ½ and have owned the account for five or more years, you can take tax-free and penalty-free distributions of earnings.
    • You can take tax-free withdrawals of contributions at any age for any reason.
    • To contribute to a Roth IRA, your modified adjusted gross income (MAGI) must fall within specific income ranges depending on your tax filing status.
    • Some special circumstances allow you to take limited tax-free distributions of earnings from a Roth (e.g., if you’re purchasing your first home or if you’re disabled).

To max out the full annual contribution limits, your MAGI must be as follows:

    • 2024 income limits for married filing jointly less than $146,000; single/head of household less than $138,000

You can make reduced contributions if your MAGI is:

    • 2024 married filing jointly $230,000 or more, but less than $240,000; single head of household $146,00 but less than $161,000

Roth IRAs vs. Traditional IRAs: How to Decide

The questions to ask yourself when comparing Roth IRAs vs. traditional IRAs are essential in choosing which account is best for you.

Do you want to defer paying taxes until you retire because you are in a higher tax bracket now? Or would you like the ability to take tax-free distributions in your golden years because you fear higher tax rates in the future?

If you expect to find yourself in a higher tax bracket in retirement, you may find a Roth IRA is the most beneficial plan for you. But if you are looking for a tax deduction now and prefer the immediate tax relief a traditional IRA provides—there is your choice.

However, if your situation changes in the future, you can always perform a Roth conversion of your traditional IRA funds. These transactions can be smart, but there are tax implications when converting those funds, so consult your tax professional to help you decide.

Maximize Your IRA’s Investing Power

Whether you choose a Roth or a traditional IRA—you can self-direct either account. Self-directed Roth and self-directed traditional IRAs have all the features each account lists above. But the extra power that self-direction gives you is enormous.

Conventional IRAs are limited to assets chosen and/or sold by the plan custodian, which are typically stocks, bonds, and mutual funds. Self-directed IRAs are not restricted to those assets. In fact, thousands of alternative investments are available for self-directed retirement plans.

As the account owner, you get to choose assets for the plan instead of relying on the plan administrator or custodian to make those decisions for you (hence the term “self-directed”). And, you have the freedom to invest in things you know and understand. Imagine putting your own knowledge to work and investing in tangible assets, like real estate and gold, to build retirement wealth.

Have Questions about Self-Directed IRAs? Advanta IRA Has Answers.

Advanta IRA is a leader in self-directed IRA administration with $3 billion in client assets under management. Contact us today to schedule your free consultation and learn how self-directed IRAs, 401(k)s, and other self-directed plans can help you build the retirement savings you deserve.

This article was initially published on February 2, 2023, and has been updated with current information.

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About Scott Maurer

Scott Maurer, Vice President of Sales for Advanta IRA, is a recognized expert in the field of self-directed IRAs. With a law degree from the University of Florida and as a designated Certified IRA Services Professional (CISP), Scott’s keen understanding of rules and regulations fuels his passion to educate others on the power of investing in alternative assets using self-directed IRAs. Scott is a frequent guest on retirement and investing webinars and podcasts, and he has shown thousands of individuals how to achieve financial freedom by teaching them how to use their retirement funds to invest in private placements, real estate, private lending, and more. Throughout his two decades in the industry, he has watched numerous unique investments unfold, giving him great perspective of what is possible when people take control of their retirement funds and investing decisions.