No matter your age, it’s never too early to start planning for retirement. Trying to choose the best IRA (individual retirement account) can be confusing. A traditional IRA and a Roth IRA both have different advantages. While you might already be invested in an employer-sponsored retirement plan, an IRA allows you to save more and possibly save on taxes.

Traditional IRA

A traditional IRA is an individual retirement account that allows you to make contributions on a pre-tax basis based on income limitations. As a result, it’s a good choice for a person who expects to be in the same or lower tax bracket when he or she starts taking withdrawals. You will enjoy immediate tax benefits, based on income limitations for participants in employer-sponsored plans and contributions will grow tax-deferred. Because of this, contributions now may lower your annual income and reduce your tax obligation.

As a result of the contributions made on a pre-tax basis, you will have to pay taxes down the road, when you start taking withdrawals.  Although withdrawals can be made penalty-free, they are taxed at the current income rate after age 59 ½. It’s also mandatory to take distributions after age 72. If you withdraw from your IRA before age 59 ½ you may be subject to a 10% early withdrawal penalty. There may be certain exemptions to the early withdrawal penalty, such as major health care costs, college costs, first home purchases, or military service among a few others. Many restrictions apply, so speak to your tax advisor for details.

Roth IRA

In contrast to a traditional IRA, a Roth IRA allows you to make after-tax contributions. Hence, it’s best suited for those who expect to be in a higher tax bracket when they start taking withdrawals. Although you have no current-year tax benefits, contributions will grow tax-free. Roth IRAs let you withdraw contributions anytime for any purpose without tax or penalty.

Flexible early withdrawals are a big advantage of a Roth IRA. To reiterate, this is because a Roth IRA is funded with money that you’ve already paid income taxes on. Withdrawals from a Roth IRA can be made penalty and tax-free after 5 years and age 59 ½ with no mandatory distributions. To be specific, there is no requirement to take any money out of a Roth IRA at any age. This is an advantage over a traditional IRA.

If you are younger, comparing the benefits of IRAs is especially important. The longer you have between now and retirement, the more important tax-free growth in a Roth IRA can become.

Traditional vs. Roth IRA

To sum it up, the IRS offers an immediate tax deduction for contributions to a traditional IRA. Money then grows tax-deferred until retirement. High-income earners may find it best to take the tax deduction now and pay taxes later. Meanwhile, contributions to a Roth IRA are made with after-tax dollars and can be withdrawn tax-free in retirement. if you believe your tax bracket will be higher when you retire than it is today, you may want to consider a Roth IRA. Conversely, if you believe your tax bracket will be lower when you retire and your goal is to lower your taxable income today, a traditional IRA might be the better option.

A traditional IRA might be your only option if you don’t qualify for a Roth IRA due to income restrictions. On the other hand, if you meet the requirement for a Roth, the versatility it provides might make more sense. Finally, understanding your options and the pros and cons of retirement accounts can help you invests now and better prepare for the future. Both traditional and Roth IRAs are great long-term savings tools, so educate yourself on the differences to make a more informed decision.

Tap to read specifics from the IRS on the topics of IRA Contribution Limits and IRA Deduction Limits.

Spirit Financial Credit Union IRA Accounts

Spirit Financial Credit Union offers both traditional and Roth IRA account options. Tap here to learn more.