IRA Basics: Roth vs. Traditional

Getty Images

The right IRA can help you grow your retirement savings.

En español |  An individual retirement account (IRA) can provide tax advantages that allow your money to grow faster, giving you more money in retirement. Consider these basics when deciding if putting some money (or more money) in an IRA is right for you.

What is an IRA?

An IRA is an investing tool used by individuals to earn and earmark funds for retirement savings. It comes in different varieties. The two most common are traditional IRAs and Roth IRAs.

Traditional IRAs give you a tax deduction when you contribute but are usually taxable when you withdraw. Roth IRAs, on the other hand, provide no upfront tax deduction but you typically owe no taxes when you withdraw. You can think of a traditional IRA as tax-deferred and a Roth IRA as tax-free.

Which is better for me — a traditional or Roth IRA?

In general, if you believe you are at a higher tax rate today than you will be when you withdraw the money, a traditional is probably better. No one knows future tax rates, however. Mike Piper, a St. Louis-area certified public accountant and the author of Taxes Made Simple, recommends investing in both to achieve tax diversification.

There are additional differences, including when funds can be withdrawn without penalties. Ordinarily, a traditional IRA has a 10 percent penalty on withdrawals made before age 59 1/2, and annual withdrawals become mandatory at age 72. (These required minimum distributions, or RMDs, used to kick in at 70 1/2, but Congress raised the age for people who turn 72 after June 30, 2021.)Roth IRAs generally have more flexible withdrawal rules.  

See also: Which states tax retirement distributions?

How much can I put into an IRA?

For the 2022 tax year, you can contribute up to $6,000 to an IRA. (That goes up to $6,500 in 2023.) If you are 50 or over, you can contribute an additional $1,000. You must, however, have earned income — wages from a job or self-employment — equal to or above the amount contributed.

The limit applies to both Roth and traditional IRAs, but there’s an additional wrinkle for Roths. With these accounts, you can only contribute up to the maximum if your modified adjusted gross income (MAGI) for the year is less than $129,000 for a single taxpayer or $204,000 for a married couple filing jointly. 

You can make a reduced contribution if your MAGI is between $129,000 and $144,000 (single) or $204,000 and $214,000 (married). Above those levels, you cannot make a Roth IRA contribution.

Can my spouse and I each have one? Or is the maximum amount limited to a household?

You each can contribute to your own IRA. In fact, the earned income rule can be spread to both spouses if you file a joint tax return. For example, if one spouse didn't work but the other spouse earned at least $14,000 and both were over 50, each spouse could contribute the maximum $7,000.

Can I contribute and get a deduction even if I'm eligible to contribute to a 401(k) plan at work?

You can put money into an IRA if you also have a workplace retirement plan, but the tax deduction is subject to income limits. Here’s how it works in 2022:

• If your MAGI is under $68,000 as a single or under $109,000 for a married couple filing jointly, you can deduct up to the maximum IRA contribution.
• Between $68,000 and $78,000 (single) or $109,000 and $129,000 (married), you can deduct some of your IRA contribution.
• At $78,000 or more (single) or $129,000 or more (married), you cannot deduct any of your IRA contribution.

The income limits will go up in the 2023 tax year.

If I have a 401(k) and an IRA, which one should I fund first?

You almost never want to miss out on any employer matching on your 401(k), so funding that up to the amount your employer matches comes first. Beyond that, I typically recommend putting your money into whichever vehicle has the lowest costs and broadest choices.

See also: Tax breaks for the 50-plus

Is it too late to contribute and get the deduction for 2022?

No. You have until April 18, 2023, to make a contribution and deduct it on your 2022 tax return. However, it's best to make your contribution earlier.

I've always said investing was simple; I never said taxes were. Though there are many exceptions, the answers I've provided to the questions above give you some guidelines to think about and discuss with your tax adviser. Tax breaks are always a good thing, and both traditional and Roth IRAs can be beneficial.

Editor’s note: This article was published March 20, 2017. It has been updated with more recent information about IRA contribution limits and withdrawal rules.

Allan Roth is the founder of Wealth Logic, an hourly based financial planning firm in Colorado Springs, Colo. He has taught investing and finance at universities and written for Money magazine, the Wall Street Journal and others. His contributions aren't meant to convey specific investment advice.