In this episode of Allgen’s Money Minute, Jason Martin and Paul Roldan will uncover the differences between Roth IRA and the Traditional IRA.

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When it comes to saving for retirement, there are several options available to individuals. Two popular retirement savings accounts are the Roth IRA and the Traditional IRA. Both of these accounts offer tax-advantaged ways to save for retirement, but they have some key differences that individuals should consider when deciding which one is right for them.

A Roth IRA is an individual retirement account that allows individuals to save for retirement with after-tax dollars. This means that contributions to a Roth IRA are made with money that has already been taxed, so when it comes time to withdraw funds in retirement, those withdrawals are tax-free. Additionally, Roth IRAs offer the flexibility of being able to withdraw contributions (but not earnings) at any time without incurring taxes or penalties.

On the other hand, a Traditional IRA is an individual retirement account that allows individuals to save for retirement with pre-tax dollars. Contributions to a Traditional IRA are made with money that has not yet been taxed, so individuals get a tax deduction in the year they make the contribution. However, when funds are withdrawn in retirement, they are subject to income tax at the individual’s tax rate at that time.

So, what are the key differences between the two accounts? The main difference lies in the tax treatment of contributions and withdrawals. With a Roth IRA, contributions are made with after-tax dollars and withdrawals are tax-free. With a Traditional IRA, contributions are made with pre-tax dollars and withdrawals are subject to income tax.

Another key difference is eligibility. While anyone with earned income can contribute to a Traditional IRA, there are income limits for contributing to a Roth IRA. In 2021, individuals with a modified adjusted gross income (MAGI) of more than $140,000 (or $208,000 for couples) are not eligible to contribute to a Roth IRA.

Additionally, there are differences in the rules for required minimum distributions (RMDs). With a Traditional IRA, individuals are required to start taking withdrawals from the account at age 72, whereas with a Roth IRA, there are no RMDs during the account owner’s lifetime.

So, which account is right for you? The decision ultimately depends on your individual financial situation and retirement goals. For individuals who expect to be in a higher tax bracket in retirement or who want to maximize tax-free income in retirement, a Roth IRA may be the better option. On the other hand, for individuals who want to receive a tax deduction for their contributions now or who expect to be in a lower tax bracket in retirement, a Traditional IRA may be the better choice.

It’s important to carefully consider the differences between Roth and Traditional IRAs and to consult with a financial advisor to determine which account is the best fit for your retirement savings goals. Ultimately, both types of accounts offer valuable tax advantages and can help individuals save for a secure retirement.