Trust the federal government to make a short story long. It’s easy to explain the difference between a traditional IRA and a Roth IRA. It’s harder to decide which of these individual retirement accounts you should contribute your savings to.

Not that you have to decide. You can have both, and contribute to one or the other, or both, every year throughout your working life.

Which begs the question, if you have to choose just one account to contribute your retirement savings to this year, should it be a traditional IRA or a Roth IRA? The answer depends on where you are in your career and personal life that year. And, yes, there might be years when the answer is “both.”

Here are the basics. (The fine print is important, too, but more on that later.)

Traditional vs. Roth IRA

Both types of IRA, or individual retirement account, were invented by the federal government to encourage Americans to save more. That’s why both offer incentives in the form of tax breaks.

The traditional IRA is a savings account that reduces your income tax immediately by the amount you contribute every year. You will pay taxes on that income, and on the investment income it accumulates, once you retire and begin withdrawing the money.

The Roth IRA, a newer innovation, requires you to pay the income tax immediately on the money you contribute. When you retire and begin withdrawing from your account, the money will be tax free, both your contribution and the income it generates.

The big differences are easy to grasp:

  • A traditional IRA is a relatively painless way to save. The money you put in is partially offset by the money you save in that year’s taxes.
  • The Roth IRA can add up to big savings on your taxes after you retire. You’ve paid the taxes up front on a modest yearly contribution, but you’ll pay no taxes on the income that accumulates over time.

When It Matters

Both types of retirement account have the potential to maximize your savings while minimizing the income tax you pay, now or later. (For more, see The Best Strategies to Maximize Your IRA and The Best Strategies to Maximize Your Roth IRA.) The question is how to make the most of those benefits. Your strategy might change from one year to the next, or at least from one stage of your life to the next.

More prosaically, it also depends on how much of your income you’re paying in taxes this year, and how much you expect to pay after you retire. That is, if the immediate tax savings of a traditional IRA are negligible, you might as well pay the taxes up front and put your money in a Roth IRA. If you think you’re currently in a higher tax bracket than you will be after you retire, the traditional IRA could be a better deal.

Here are a few sample scenarios:

If You’re Young…

Say you’re under age 30, and just settling into your career. You’re probably nowhere near your peak earning years.

And that means your income tax bill is pretty modest. As this chart from Bloomberg News, based on a Congressional analysis, shows, the average American making less than $75,000 will pay less than 5% in federal income tax in 2015. A person who earns less than $40,000 is getting money back from the government. (As Bloomberg points out, those figures reflect just income tax, after deductions, and do not include Medicare or Social Security taxes, or taxes on goods like gasoline.)

Here’s the point: At this time in your life, you could be paying so little in income tax that a tax break won’t do you much good.

Now’s the time – if you can swing it – to put some after-tax money into a Roth IRA. The payout date may be far down the road, but you’ll be a lot happier when you get there and see all the tax-free dollars that have been compounding over the years. (See The Basics of Roth IRA Contributions.)

When You’re Youngish…

Say you’re between 30 and 50 years old. You’re entering your peak earning years, and you have the lifestyle to show for it. That could well mean a home mortgage deduction, a child tax credit or two and the benefits of filing as one half of a married couple.

Surprisingly, even though you’re in a higher tax bracket, your income tax burden after deductions isn’t that high. The average income tax rate paid by people making up to $200,000 a year is under 10%.

Granted, part of that low rate might be because people in their prime earning years are likely to take full advantage of the traditional IRA’s tax-deferral power.

Nevertheless, if you can spare the cash, try to sock at least part of it in a Roth IRA. Here’s one factor that could be persuasive: Unlike a traditional IRA, you can withdraw money you put into a Roth IRA without a penalty or additional taxes owed, at any age and for any reason. (Note that this is the money you put in, not the income it earned. The income in a Roth IRA is available only if it’s a “qualified distribution.”)

You wouldn’t want to access a retirement account frivolously, but in an emergency it will be there, if it’s a Roth IRA.

If You’re Closer to Retirement…

When you hit age 50, you may still be pretty far from retirement, but you’re thinking about it. The federal government acknowledges that you should be thinking about it, by upping the maximum contribution to an IRA by $1,000, to $6,500 for an individual age 50 or over, as of 2015 and 2016.

If you anticipate that your taxable income will be lower after you retire, you might take advantage of the immediate tax savings and go for the traditional IRA. Or you might consider putting at least a portion of your savings in the Roth IRA, so you can look forward to some tax-free income in the future.

…Unless You Don’t Really “Retire”

The traditional IRA has an age cap of 70½, after which you can no longer make contributions and must start taking distributions. However, there’s no age cap on Roth IRA eligibility.

So, if you’re 71 or older and still working for fun and/or profit, you can keep socking away as much cash as you want in a Roth IRA and enjoy the proceeds down the road.

Other Dos and Don’ts

There’s an income limit. If your income is too high, you have no choice except a traditional IRA. As of 2015, an individual earning $131,000 or more cannot open a Roth IRA account. The figure is $193,000 for a couple filing jointly.

A Roth IRA can help your heirs. For estate planning, the Roth IRA has additional benefits. The biggest, of course, is that a surviving spouse can inherit money that will be tax-free. Even other heirs, such as children, have some flexibility in how and when they can use the money while minimizing the tax they owe on it.

There’s no time limit on Roth IRA withdrawals. The rules on a traditional IRA require the taxpayer to begin tapping the account every year after age 70½. Presumably, the government considers that you’ve sat on that untaxed money for long enough. (See An Overview Of Retirement Plan RMDs.)

But the Roth IRA is all yours. You can take as much or as little out of the account as you want, with no tax implications.

The Bottom Line

You can get to a comfortable retirement through a traditional IRA, or a Roth IRA, or a combination of the two. Choosing to fund a traditional IRA or a Roth IRA is a matter of financial strategy and personal priorities. And for all of us, those change over time.

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