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America Saves Week is here and there’s no better time to explore ways to grow your retirement savings, no matter where you are on your financial journey. Whether you are decades away from retirement or it’s just around the corner, an individual retirement account, or IRA, could be a great option to help you save toward your goals. First you will want to decide whether a Traditional IRA or Roth IRA (or both) is the right choice for you. Here are the major differences between Traditional and Roth IRAs.

First things first. What is an IRA?

An individual retirement account, or IRA, is a tax-advantaged savings account that is geared toward building retirement savings. Both Traditional and Roth IRAs have this definition in common, as well as their annual contribution limits. In 2019, you may contribute a maximum of $6,000 to your Traditional IRA or Roth IRA, or a total of $6,000 if you have both accounts. It’s the first time the IRS has increased IRA contribution limits since 2013. And if you are 50 and over, you can contribute an additional $1,000 this year, bringing your total 2019 IRA contribution to $7,000. If you choose to make investments within your IRA, you can benefit from further tax advantages.

What is the major difference between Roth IRA and Traditional IRA?

To start, the major difference between Roth IRA and Traditional IRA is how taxes relate to your contributions and withdrawals. Contributions to a Traditional IRA are not viewed as taxable income and are therefore fully or partially deductible. If you are not covered by a retirement account, either by your employer or by your spouse’s employer, your Traditional IRA contributions are fully deductible. For those who are covered by an employer’s retirement account individually or through a spouse, Traditional IRA contributions may still be deductible, depending on your household income and tax filing status. (You can find those details here.) This offers you an immediate tax break, however when you withdraw from your Traditional IRA, the money will be taxed based on your tax bracket at that time.

On the other hand, contributions to a Roth IRA are considered taxable income and are therefore taxed at the time they are put into your account. Being taxed up front means that qualifying withdrawals can be made tax-free at any time, as long as your account has been open for at least 5 years. And unlike a Traditional IRA, your coverage by an employer retirement account, whether it’s your employer or your spouse’s, does not impact your eligibility to contribute to a Roth IRA. The only requirement to start one is having earned income, but more on that later.

There are also cutoffs for contributing to a Traditional IRA or Roth IRA. Once you reach 70 ½, you may no longer make contributions to your Traditional IRA and are also required to start taking money out of the account. There is no age limit for contributing to or distributing from a Roth IRA, however once you reach a certain income level, your maximum annual contribution will be decreased or barred entirely. This also depends on how your household files taxes, so be sure to brush up on 2019 Roth IRA contribution limits.

What are the advantages of Roth IRA vs Traditional IRA?

The differences between a Traditional IRA and a Roth IRA raise an important question: which one is right for you? For the purpose of Roth vs Traditional IRA comparison, we’ll proceed under the assumption that income levels and tax filing procedure qualify for full deductions for a Traditional IRA and maximum allowed contributions for a Roth IRA.

If you regularly owe money after taxes, your annual Traditional IRA tax deduction can help you lower your out of pocket costs when paying back the federal government. A Traditional IRA is also a good choice for high earners or those on a career path that will raise them into a higher tax bracket in the future. As mentioned above, once your household reaches the year’s designated income level, you can no longer contribute to a Roth IRA. With a Traditional IRA, you can continue contributing until you reach 70 ½, no matter how much more or less you make over the course of your career as long as you have earned income.

Roth IRAs carry a lot of benefits, especially for those just starting out in their careers. All you need to be eligible to open and contribute to a Roth IRA is earned income, so the 18-year-old baby sitter or the college student working part time at their campus café could both start saving toward retirement with a Roth IRA. These first-time employees will also benefit from being in a lower tax bracket, meaning less will be taken from their contributions today in the form of income tax and will be tax-free when they go to use it later.

While opening a Roth IRA is a great option at any age as long as you are employed and your income is below the limit allowed, Roth IRAs carry some serious benefits for young savers. Consider today’s college students who are moving back home after graduation or young people sharing affordable apartments with roommates or a significant other. Making regular contributions to a Roth IRA while their taxable income is low can really help them get ahead later in life. Even if your contributions today are small, just getting started is key for establishing a lifetime of positive saving habits.

The earlier you start thinking about opening an IRA for retirement savings, the longer you will have to save and the more prepared you will be once it comes time to retire. Individual Retirement Accounts are great options to help you get ahead and build the retirement you’ve been dreaming about, no matter where you are on your financial journey.

To learn which IRA is right for you, visit our FutureTrack site.

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