And which one saves you more depends largely on your current income, tax bracket, and long-term financial goals.
How a Traditional IRA Works
A Traditional IRA lets you contribute pre-tax dollars. This means you get an upfront tax deduction, lowering your taxable income today. The money then grows tax-deferred until retirement, when withdrawals are taxed as ordinary income. For many savers, this approach makes sense if they expect to be in a lower tax bracket later in life.
How a Roth IRA Works
A Roth IRA flips the script: contributions are made with after-tax dollars, so you don’t get a deduction now. However, your money grows tax-free, and qualified withdrawals in retirement are not taxed. This can be a huge advantage if you expect to be in the same—or even higher—tax bracket in the future.
Which One Saves More?
- Short-term savers often benefit more from the Traditional IRA’s immediate tax break.
- Long-term investors, especially younger workers with decades ahead of them, may find the Roth IRA more powerful since tax-free growth compounds over time.
- High earners nearing retirement sometimes use a mix, contributing to both accounts if eligible, to diversify their tax exposure.
Other Factors to Consider
- Income limits: Roth IRAs have contribution limits based on your earnings, while Traditional IRAs are more flexible.
- Required minimum distributions (RMDs): Traditional IRAs require withdrawals starting at age 73, while Roth IRAs do not—giving you more control over your money.
- Estate planning: Roth IRAs can be passed to heirs tax-free, an appealing feature for many families.
The Bottom Line
There’s no one-size-fits-all answer. The best choice depends on your current tax situation, your expected retirement lifestyle, and how long you have to let your money grow. Many financial advisors even suggest splitting contributions between both types to balance tax advantages now and later.
