As you may have read in my past posts, I’m all about investing in the stock market, doing your own research, and taking control of your own finances. But I do understand the confidence level may not be there early on and you may be sitting on some $$ you would like to invest. You can always add more to your 401K contribution…especially if your employer does a match to a certain percentage of your own contribution. But it’s always a good idea to have an IRA account….and the earlier the better as it builds through the years and hopefully decades. But which one is right for you? That depends…here is some information on both traditional IRAs and Roth IRAs with max contribution information.
The key difference between a traditional IRA and a Roth IRA lies in the timing of tax benefits: traditional IRAs offer tax-deductible contributions now, but withdrawals in retirement are taxable, while Roth IRAs use after-tax dollars for contributions, but withdrawals in retirement are tax-free.
Here’s a more detailed comparison:
Traditional IRA:
- Contributions: Tax-deductible (reducing your taxable income in the year of the contribution).
- Growth: Tax-deferred (earnings grow tax-free until withdrawn).
- Withdrawals: Taxable as ordinary income in retirement.
- Tax Implications: You pay taxes on the money when you take it out in retirement.
- Example: If you contribute $5,000 to a traditional IRA, you can deduct that $5,000 from your taxable income for the year, but when you withdraw that money in retirement, it will be taxed as ordinary income.
Roth IRA:
- Contributions: Made with after-tax dollars (not tax-deductible).
- Growth: Tax-free (earnings grow tax-free).
- Withdrawals: Tax-free (both contributions and earnings can be withdrawn tax-free in retirement).
- Tax Implications: You pay taxes on the money upfront, but you don’t have to pay taxes on it later.
- Example: If you contribute $5,000 to a Roth IRA, you won’t get a tax deduction for that contribution, but when you withdraw that money in retirement, it will be tax-free.
Which one is right for you?
- Traditional IRA:If you anticipate being in a lower tax bracket in retirement than you are now, or if you need the immediate tax deduction, a traditional IRA might be a better choice.
- Roth IRA:If you anticipate being in a higher tax bracket in retirement than you are now, or if you want the peace of mind of knowing your retirement withdrawals will be tax-free, a Roth IRA might be a better choice.
- Consider: Your current and projected income, tax bracket, and retirement goals when making your decision.
For 2025, the maximum IRA contribution is $7,000, or $8,000 if you’re age 50 or older, and this limit applies to both traditional and Roth IRAs combined.
Here’s a breakdown:
- Maximum Contribution:The combined annual contribution limit for both traditional and Roth IRAs is $7,000, or $8,000 if you are age 50 or older by the end of the year.
- Catch-up Contribution:Individuals age 50 or older can make an additional contribution of $1,000, bringing the total to $8,000.
- Combined Limit:This is a combined limit, meaning you can’t contribute the maximum to both a traditional and a Roth IRA.
- Income Limits for Roth IRAs:Roth IRA contribution limits are reduced or eliminated at higher incomes, depending on your filing status.
- Single Filers: To contribute the full amount, your modified adjusted gross income (MAGI) must be less than $150,000.
- Married Filing Jointly: Your combined MAGI must be less than $236,000.
- No income limit for traditional IRA:Anyone can contribute to a traditional IRA, regardless of income.