Traditional vs. Roth IRAs: does it matter?

April 12, 2024


Placing your hard-earned savings into an investment vehicle like an IRA can feel like an achievement, but how do you know which one to choose? And does it really matter? Yes! It does matter and here's why.

Given the financial pressures many Americans face, putting savings in any long-term investment vehicle can feel like an achievement. By the time you’ve found a financial professional, combed through your financial history, and thought through your plans for the future, you may feel confident that saving for retirement using an IRA can help you live out your later-in-life dreams.

Other aspects, though, may be less clear. For example, should you pick a traditional IRA or a Roth—or both? And does it really matter?

Actually, yes, it does. And to understand why, let’s explore the similarities and differences between the two.
 

Traditional IRA vs Roth IRA: how are they similar?

  • Both are long-term savings and investment products.
  • This may sound similar to a 401(k), but IRAs and 401(k)s are not the same. A 401(k) is a type of employer-sponsored retirement account, whereas IRAs—both traditional and Roth—are individual retirement accounts.
  • Both offer tax advantages. 
     

Traditional IRA vs Roth IRA: how are they different?

  • They offer different kinds of tax advantages.
  • Traditional IRAs provide an upfront tax deduction, meaning you contribute to your IRA from pre-tax income and then pay taxes on it later, when you take withdrawals during retirement. However, deductibility may be phased out or eliminated depending on income for traditional IRA contributions.
  • Roth IRAs require you to pay taxes on contributions upfront.
  • They differ on income limits. No matter how much money you earn, you can contribute to a traditional IRA whereas a Roth IRA has income limits. For Roth IRA contributions in the year 2023, for example, individual single filers are not eligible to contribute if they have a Modified Adjusted Gross Income (MAGI) of $153,000 or more, with contributions being reduced starting at $138,000 MAGI.1 
     

How to know what's right for you

To create a plan involving any investment with tax considerations, we recommend that you discuss your options with your financial professional. Just because it’s called an individual retirement account doesn’t mean you should try to figure it out on your own.
 

IRA considerations

One of the key points to consider in this IRA conversation with your financial professional might be your current income compared to what you think your income will be in retirement. Depending on when you think your tax rates will be higher, it might make more sense to choose one investment over another.
 

The best of both worlds

In discussing a Roth IRA vs a traditional IRA you may realize that you’re less interested in choosing between a Roth and a traditional IRA and that you’re more interested in strategically combining them. You can mix traditional IRAs, Roth IRAs, conversions, and Social Security to create a tax-effective retirement strategy that helps you stretch your nest egg further.

For example, Roth distributions don’t count as gross income when the IRS determines Social Security benefits taxation. This means that consumers can benefit by drawing from two buckets—the Roth and the traditional IRA—to enjoy significant tax savings.2

Alternatively, you could split the income deficit between the traditional and Roth accounts from the start. Not only can the Roth income keep your tax bracket and benefits taxation low throughout retirement, but drawing down tax-deferred accounts can reduce required minimum distribution (and other) taxes later.3

Combining Roth and traditional distributions can make it easier to delay taking Social Security until you turn 70. The savings in both buckets could enable you to live on distributions early in retirement, paying taxes on half of your income or less. When you do collect, however, you’d have a substantially higher benefit,4 which would let you draw less from both accounts, further reducing your taxes while helping to protect against the risk of outliving your money.

While these are all important things to consider, no two retirees’ needs are the same. So, discuss these and other options with your financial professional to figure out if an IRA may be right for you. 

 

1. IRS, “Publication 590-A (2022), Contributions to Individual Retirement Arrangements (IRAs), ” February 8, 2024.

2. Elizabeth Gravier, CNBC, "Traditional and Roth IRAs both offer tax breaks, but not at the same time—here's how they differ, " July 30, 2023.

3. Donna Fuscaldo, Investopedia, "4 Strategies to Limit Required Minimum Distributions (RMDs)," March 9, 2023.

4. Dennis Sebayan, Smart Asset, "How to Get the Maximum Social Security Benefit", November 16, 2022.

This material was prepared to support the promotion and marketing of Jackson annuities. Jackson, its distributors, and their respective representatives do not provide tax, accounting, or legal advice. Any tax statements contained herein were not intended or written to be used and cannot be used for the purpose of avoiding U.S. federal, state, or local tax penalties. Tax laws are complicated and subject to change. Tax results may depend on each taxpayer’s individual set of facts and circumstances. You should rely on your own independent advisors as to any tax, accounting, or legal statements made herein.

Annuities are issued by Jackson National Life Insurance Company (Home Office: Lansing, Michigan) and in New York, annuities are issued by Jackson National Life Insurance Company of New York (Home Office: Purchase, New York). Variable products are distributed by Jackson National Life Distributors LLC, member FINRA. May not be available in all states and state variations may apply. These products have limitations and restrictions. Contact the Company for more information.

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