My FICO logo $$$$$$$$$$$ 9876 5432 1234 5678 CREDIT CARD KELLY SMITH 11/26 My FICO logo
SCORE
Skip Navigation
  • Why FICO
  • How It Works
  • Pricing
  • Education
  • Community
  • Support
  • Member Dashboard
  • Log In Log Out
  • Start Plan
 
  • Why FICO
  • How It Works
  • Pricing
  •  
  • Education
    • Credit Education
    • Credit Scores
    • What Is a FICO Score?
    • FICO Scores vs Credit Scores
    • FICO Scores Versions
    • New FICO Scores
    • How Scores Are Calculated
    • Payment History
    • Amount of Debt
    • Length of Credit History
    • Credit Mix
    • New Credit
    • How to Improve Your Score
    • How to Build Credit
    • Credit Reports
    • What's in Your Report
    • Credit Bureaus
    • Inquiries
    • Errors on Your Report?
    • Blog
    • Calculators
    • Loan Savings
    • Vehicle Payments
    • How Much Can I Borrow?
    • Should I Consolidate My Credit Cards?
    • Know Your Rights
    • Identity Theft
    • FAQ
    • Glossary
  • Community
  • Support
  • Member Dashboard
  • Log In Log Out
  • Our Products
    • Ongoing Credit Monitoring Track your FICO® Score & identity
    • One-time Credit Reports Be prepared for important transactions
  • How Can We Help
    • Monitor Credit & Identity
    • Mortgages
    • Credit Cards
    • Auto Loans
  • Credit Education
  • Community
  • Support
  • Our Products
    • Ongoing Credit Monitoring Track your FICO® Score & identity
    • One-time Credit Reports Be prepared for important transactions
  • Credit Education
  • Credit Scores
    • What Is a FICO Score?
    • FICO Scores vs Credit Scores
    • FICO Score Versions
    • New FICO Scores
    • How Scores Are Calculated
    • Payment History
    • Amount of Debt
    • Length of Credit History
    • Credit Mix
    • New Credit
    • How to Improve Your Score
    • How to Build Credit
  • Credit Reports
    • What's in Your Report
    • Credit Bureaus
    • Inquiries
    • Errors on Your Report?
  • Blog
  • Calculators
    • Loan Savings
    • Vehicle Payments
    • How Much Can I Borrow?
    • Should I Consolidate My Credit Cards?
  • Know Your Rights
  • Identity Theft
  • FAQ
  • Glossary
View all Personal Finance articles

TRADITIONAL IRA vs. ROTH IRA: Which is right for you?

September 28, 2016, by Rob Kaufman

DID YOU KNOW... "IRA" stands for "Individual Retirement Account"?

That might appear to be a nonsensical question, but many of us have become so used to saying the __ word __ "IRA" that we don't often remember it's an acronym made up of __ three __ words - "Retirement" being the most important.

Retirement is something that happens in the future, which is where we need to focus our attention when making the decision about what type of IRA in which to invest. Which will work best for us in 20... 30... 40 or more years from now? Which type of investment will provide the most income with the best tax benefits? These are difficult questions to answer (unless you're one of those rare individuals who can forecast the future), but there are shrewd and logical ways to invest now so that you can have more peace of mind when retirement time arrives.

First and Foremost - the 401(K)

Yes, we're supposed to be talking about a Traditional IRA versus a ROTH IRA, but it's crucial to remember that if your company offers to match your 401(K) contribution, that is where your contribution priority should exist. Otherwise, you're turning away free money. This doesn't mean that all of your available investment capital should go into your 401(K), but try to contribute enough so that you're receiving the maximum match by your employer. Once that's taken care of, there's the decision of...

Traditional IRA or ROTH IRA?

Before knowing what type of IRA works best for you, it's important to know the difference between the two.

A Traditional IRA is an account that holds a variety of investments (i.e. stocks, bonds, mutual funds, etc.) and grows over time tax-free. This tax "deferment" means that earnings such as interest, dividends and capital gains don't get taxed until you take distributions (withdrawals). You can also use your Traditional IRA contributions as a tax deduction.

In a ROTH IRA, the contributions come out of taxable income. A ROTH is an account that also holds a variety of investments, however, you pay taxes upfront (at your current tax rate) and do not pay taxes when it comes time to withdraw those funds. Note: a ROTH IRA cannot be used as a tax deduction.

There are a number of factors that an investor can use to determine which type of IRA is best for them.

  • Current Tax Bracket . If your current tax bracket is high, most likely your tax bracket during retirement will be lower (not always the case, but very likely). This means that in order to maximize your investments, a Traditional IRA could be the best bet. That's because you can get tax deductions on the contributions you make today __ and __ pay a lower tax rate on post-retirement withdrawals because you'll be in a lower tax bracket.

  • Future Tax Bracket . If you expect your tax rate at retirement to be higher than it is today, a ROTH IRA might be more advantageous since the total tax that you can avoid in retirement will probably be more than the income tax paid on the present contribution amount. Using this train of thought, younger and lower-income workers can benefit the most from a ROTH IRA.

  • Contribution Limits. With a ROTH IRA you can contribute for as long as you'd like (more money for heirs). With a Traditional IRA no contributions are allowed starting in the year you turn 70 ½ and any time thereafter.

  • Required Minimum Distribution (RMD). ROTH IRA owners are not subject to RMD. Traditional IRA owners must begin taking RMDs starting on April 1 of the year following the year they turn 70 ½. In both cases, beneficiaries are subject to RMD rules.

Do you have to choose one or the other?

In a perfect world, the answer would be "no". The optimal strategy would be to invest in __ both __ a Traditional IRA and ROTH IRA since each type has its own unique benefits.  Unfortunately, many of us lack the finances to contribute to a multitude of investment vehicles and must make a choice determined by our current (and future) individual monetary needs.

So, if presently, you don't have the income to invest in both a Traditional __ and __ ROTH IRA, take the considerations listed above and make the choice that you feel will best suit you now and down the line. If you find that later on you have additional money to use for investment purposes, you can always open the other type of account - both Traditional and ROTH IRAs will be around for a long time to come.

*For ideas on what investments might work inside your IRA account, read this myFICO blog. You can always visit the myFICO Forum to read about how other people are investing their money. *

Rob Kaufman

Rob is a writer... of blogs, books and business. His financial investment experience combined with a long background in marketing credit protection services provides a source of information that helps fill the gaps on one's journey toward financial well-being. His goal is simple: The more people he can help, the better.

Estimate your FICO Score range

Answer 10 easy questions to get a free estimate of your FICO Score range

740 - 790
Estimate for Free

Instant Access to Your FICO® Score

90% of Top Lenders Use FICO® Scores. Do you know yours?

Get Access Now!

Page footer

Products

  • Home
  • Why FICO
  • How It Works
  • Pricing

Learn

  • Education
  • Community
  • Support
  • Blog

Company

  • About Us
  • Terms of Use
  • Privacy Policy
  • Affiliate Program
  • Accessibility

Get Our App

  • Download iOS app on the App Store
  • fil_get
    Get Android app on the Google Play Store

Follow Us

  • Twitter
  • Facebook
  • Instagram

Credit Education

  • Credit scores
  • What is a FICO Score?
  • FICO Score versions
  • How scores are calculated
  • Payment history
  • Amount of debt
  • Length of credit history
  • Credit mix
  • New credit
  • Credit reports
  • What's in your report
  • Bureaus
  • Inquiries
  • Errors on your report?
  • Calculators
  • Know your rights
  • Identity theft
  • FAQ
  • Glossary

Copyright ©2001- Fair Isaac Corporation. All rights reserved.

IMPORTANT INFORMATION:

All FICO® Score products made available on myFICO.com include a FICO® Score 8, and may include additional FICO® Score versions. Your lender or insurer may use a different FICO® Score than the versions you receive from myFICO, or another type of credit score altogether. Learn more

FICO, myFICO, Score Watch, The score lenders use, and The Score That Matters are trademarks or registered trademarks of Fair Isaac Corporation. Equifax Credit Report is a trademark of Equifax, Inc. and its affiliated companies. Many factors affect your FICO Scores and the interest rates you may receive. Fair Isaac is not a credit repair organization as defined under federal or state law, including the Credit Repair Organizations Act. Fair Isaac does not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit record, credit history or credit rating. FTC's website on credit.

PRIVACY NOTICE: When you visit this website we collect your browsing activities on our site and use that information to analyze and research improvements to the website, and to our products and services. When you register for our products and services, we also collect certain personal information from you for identification purposes, such as your name, address, email address, telephone number, social security number, IP address, and date of birth. Further information is available in our FICO Data Privacy Policy. For visitors with visual disabilities, access to this website, including our FICO Data Privacy Policy, is available through assistive technologies, such as BrowseAloud, JAWS, VoiceOver, Narrator, ChromeVox, and Window-Eyes. More details on software and accessibility are available at WebAIM.org.