Choosing between IRAs can be challenging because they both have great benefits. You can't go wrong with either choice because of their tax breaks, but it mostly comes down to when you want to reap the benefits of the account.
Here are two things to consider when picking between IRAs.
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1. Your current vs. expected tax bracket
When considering a Roth IRA or traditional IRA, it primarily comes down to your current tax bracket and where you expect your tax bracket to be in retirement. With a Roth IRA, you contribute after-tax money and receive your tax break on the back end by having your money grow and compound with tax-free withdrawals in retirement. With a traditional IRA, you get your tax benefit on the front end. Although you technically contribute after-tax money into a traditional IRA, there's a chance that your contributions are deductible.
As of 2022, the maximum amount you can contribute to an IRA -- both Roth and traditional -- is $6,000 ($7,000 if you're 50 or older). How much of your traditional IRA contributions you can deduct depends on your income and whether you're covered by a retirement plan by your employer.
If you are covered by a retirement plan at work, here's how much of your contributions you can deduct:
| Tax Filing Status | Income | Deduction Allowed |
|---|---|---|
| Single | $68,000 or less | Full amount |
| Single | $60,801 to $77,999 | Partial amount |
| Single | $78,000 or more | No deduction allowed |
| Married, filing jointly | $109,000 or less | Full amount |
| Married, filing jointly | $109,001 to $128,999 | Partial amount |
| Married, filing jointly | $129,000 or more | No deduction allowed |
| Married, filing separately | Less than $10,000 | Partial amount |
| Married, filing separately | $10,000 or more | No deduction allowed |
Data source: IRS.
If you're single and not covered by a retirement plan at work, or married, filing jointly (with a spouse not covered by a work plan), you can make any amount and take a full deduction.
If you're married with a spouse who's covered by a work plan, here are the income and deductions allowed:
| Tax Filing Status | Income | Deduction Allowed |
|---|---|---|
| Married, filing jointly (with a spouse that is covered by a work plan) | $204,000 or less | Full amount |
| Married, filing jointly (with a spouse that is covered by a work plan) | $204,001 to $213,999 | Partial amount |
| Married, filing jointly (with a spouse that is covered by a work plan) | $214,000 or more | No deduction allowed |
| Married, filing separately (with a spouse that is covered by a work plan) | Less than $10,000 | Partial amount |
| Married, filing separately (with a spouse that is covered by a work plan) | $10,000 or more | No deduction allowed |
Data source: IRS.
If you're at the height of your career, it's usually better to take the tax break now, when it's most valuable. For example, if you're in your peak earning years and your current tax bracket is likely the highest one you'll be in, you'd want to consider contributing to a traditional IRA now (taking the deduction if you're eligible) and then paying income taxes on your withdrawals in retirement, when your tax bracket is lower.
If you're early in your career and this is likely the lowest tax bracket you'll be in, it makes more sense to pay taxes on the money now instead of later when your bracket is higher. You'll never get out of paying taxes; Uncle Sam isn't having that. But you can be strategic about when you pay, so you can pay the least amount possible.
2. If you think you'll need the funds in retirement
Unfortunately, traditional IRAs have required minimum distributions (RMDs). No matter what, you must begin taking distributions by April of the year after you turn 72. If you don't take your RMD, the amount not withdrawn is subject to a 50% penalty -- a costly mistake. However, Roth IRAs don't have RMDs; you can keep the funds in the account as long as you choose.
If you've managed to save enough for retirement in other accounts, such as a 401(k), and decide you don't need the funds in your Roth IRA, you can keep the assets there and give them more time to grow and compound. In fact, it's not uncommon for people to do this and then pass on the account to their children when they pass away. If you believe you'll be financially comfortable in retirement without needing your IRA funds, you may want to consider a Roth IRA because it doesn't have RMDs.
