Roth IRA Vs Traditional IRA Explained

When you decide between the Roth IRA and Traditional IRA, there are differences such as income limits, contribution limits, and various rules that will impact your decision.  However, it usually comes down to taxes and whether or not you want tax-free income in retirement. But knowing how the Roth IRA and traditional IRA can work together may change your decision on which account you contribute and how much you contribute.

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    Income Limits

    The Roth IRA has income limits regardless of your other retirement plans whereas the traditional IRA deductibility may be reduced based on your filing status and workplace plan eligibility. The income limits for the traditional IRA only limit the deductible amount of the contribution.

    Roth IRA Income Limits

    Filing Status2021 Roth IRA Income Range2022 Roth IRA Income Range
    Single$125,000-$140,000$129,000-$144,000
    Married Filing Jointly$196,000-$208,000$204,000-$214,000
    Married Filing Separately$0-$10,000$0-$10,000

    The traditional IRA has no income limits for contributions, however, the deductibility of those contributions is based on your income, filing status, and if you or your spouse have access to a workplace plan.

    Traditional IRA Income Limits

    Filing & Workplace Status2021 IRA Income Limit2022 IRA Income Limit
    Single, Covered by Workplace Plan$66,000-$76,000$68,000-$78,000
    MFJ, You are covered by a workplace plan$105,000-$125,000$109,000-$129,000
    MFJ, You DO NOT have a workplace plan BUT spouse does$198,000-$208,000$204,000-$214,000

    Roth IRA and Traditional IRA Contribution Limits

    The contribution limits for the Roth IRA and Traditional IRA are combined.  The contributions for the traditional IRA may be either deductible or nondeductible.  The Roth IRA contributions are always nondeductible.

    IRA + Catchup Contribution20212022
    Roth IRA$6,000$6,000
    Roth IRA Age 50+$7,000$7,000
    Traditional IRA$6,000$6,000
    Traditional IRA Age 50+$7,000$7,000

    The Roth IRA and Traditional IRA contribution limits are the same for 2021 and 2022.  The contributions have a combined maximum of $6,000 or if you're age 50 or older, $7,000.

    For example, if you are under age 50, eligible to contribute and contribute $4,000 to your traditional IRA the maximum you can contribute to the Roth is $2,000.  The combined maximum for under age 50 is $6,000.

    The catchup contribution is $1,000 if you are age 50 or older.  The catchup contribution applies during the year you turn age 50.

    For example, in the year you turn age 50, if your birthdate is October 1st, you can make a catch-up contribution as early as January 1st.

    Roth IRA and Traditional IRA DOUBLE contributions

    Contributions can be made up until your April tax filing deadline.  In this case, you could contribute for the previous tax year and the current tax year at the same time.

    Even if you do not have enough money to contribute before December 31st of the tax year you can still make the contribution up to the April tax deadline.  Both IRAs require earned income but a spousal contribution is also eligible.

    Roth IRA vs Traditional IRA taxes

    The big difference between the Roth IRA and the traditional IRA is the taxes.  The Roth IRA goes in after-tax, grows tax-deferred, and comes out tax-free in retirement.  The traditional IRA may be either deductible or nondeductible depending on your eligibility (income, filing status, and workplace plan eligibility).

    Roth IRA vs Traditional IRA Tax Example

    IRA TypeContribution AmountGrowthDistribution
    Roth IRA$78$156$156
    Traditional IRA$100$200$156

    The example assumes a 22% tax bracket before and after retirement. The Roth IRA contributions are after-tax, so the $100 earned from a paycheck is taxed at the 22% tax bracket leaving $78 for the contribution.  The investments are going to be identical so you can see the full effect of how the two types of IRAs work.

    The investment in the example will double so the growth column is double the contribution amounts in both the Roth IRA and the Traditional IRA.

    The taxes are also the same in retirement but at this point, only the Traditional IRA is taxed since the Roth IRA distributions are tax-free.

    Which IRA to choose?

    The decision on which IRA is best or which one you should choose depends on many factors. If your tax bracket will be higher in the future, it may make more sense to use a Roth IRA, however, sometimes lowering your income today can help you qualify for more tax credits and deductions.

    Lastly, you may not really know how your taxes will change in the future.  Even if you believe your taxes will be higher, legislation may change the laws or your set of circumstances may change.