O Bee Blog

Traditional vs. Roth IRA: Which one is the best for you?

Do you have dreams of traveling the globe during your retirement? Or maybe sitting on a porch swing watching your grandkids play. Retirement might seem like a far-off ambition when you're young, but it's never too early to start planning. Opening a traditional or Roth IRA is a great way to get started. They both help you save for retirement, but each works differently. Let's break it down:

Traditional IRA: Tax Benefits Today
  • Tax Breaks Now: With a traditional IRA, you may be able to deduct your contributions from your taxes if you meet certain income requirements.
  • Taxes Later: The money you put in grows tax-deferred, meaning you  pay taxes on it once funds are are withdrawn. Often in retirement your tax bracket may  be lower, reducing the tax amount. Nonetheless, once you withdraw, you'll owe income taxes on what you take out.
  • Required Withdrawals: When you hit a specified age (currently 73), you must start taking Required Minimum Distributions (RMDs) whether or not you need the money at that time. RMDs are taxed as regular income.
Roth IRA: Tax-Free Withdrawals in the Future
  • No Tax Break Now: Contributions to a Roth IRA won't get you a tax break when you make them. You're using after-tax money, so there are no immediate tax benefits. Roth IRAs have income limits, so be sure to check if your annual income falls within the guidelines.
  • Tax-Free Growth: Your money can grow tax-free in a Roth IRA, and qualified withdrawals are tax free and penalty free. That means you may not owe any taxes on the earnings when you take the money out in retirement.
  • No Forced Withdrawals: Unlike a traditional IRA, there are no required withdrawals during your lifetime. You can leave the money there as long as you want, which may help pass wealth on to your heirs with the right estate planning.
Choosing the Right One for You
To figure out which IRA is best for you, consider a few things:
  • Taxes Now vs. Later: Consider the income requirements and decide if you’ll benefit from tax breaks now or from tax free growth later.
  • Future Tax Bracket: Consider what tax bracket you might be in when you retire. A Roth IRA might be better if you expect to be in a higher tax bracket.
  • Withdrawal Plans: How and when do you plan to use the money? A Roth IRA's flexibility could be helpful if you need it before retirement (you can access your money penalty-free after age 59 ½).
  • Estate Planning: If you want to leave money to your heirs, consider how different IRAs affect your estate planning.
  • Know Your Limits: Putting money into an individual retirement account (IRA) can get you ready for retirement. However, the IRS sets a cap on how much you can contribute to all your IRAs. In 2024, if you're under 50, the limit is $7,000, and if you're 50 or older, it's $8,000. Depending on your modified adjusted gross income you may be able to deduct some or all of your contributions.
Your future self will thank you for saving for retirement! Do you have questions or want to learn more? Visit us in-branch, online, or over the phone, and our team will help you get the answers you need!

This information is not intended to be tax, legal, or investment planning advice. Consult with a qualified tax advisor, CPA, financial planner, or investment manager to determine what will work best for you. Depending on your situation various rules related to contributions, withdrawals, penalties, and distributions may apply.


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