Roth vs Traditional IRA
An IRA is an Individual Retirement Account you open yourself, separate from any employer plan. The 2024 contribution limit is $7,000 ($8,000 if you’re 50 or older), shared across both Roth and Traditional. Traditional IRA contributions may be tax-deductible now, and withdrawals in retirement are taxed as ordinary income. Roth contributions are made with after-tax dollars, but qualified withdrawals (after age 59.5 and a 5-year hold) are completely tax-free. Roth IRA contributions phase out at higher incomes (2024: starts at $146,000 single, $230,000 married filing jointly).
You contribute $7,000 a year from age 30 to 65 at ~10% S&P 500 returns. Either account grows to roughly $1.9M. In a Traditional IRA, you saved ~$1,540 a year in tax at the 22% bracket ($53,900 over 35 years), but every withdrawal in retirement is taxed. In a Roth, you paid the tax upfront and now have a $1.9M tax-free pot you can draw from in any year without bumping your bracket. If you expect higher taxes in retirement, Roth wins.
Picking Traditional just because the deduction feels good today. If you’re in your 20s or 30s in the 12% or 22% bracket, you’re very likely to retire in a higher effective bracket once Social Security, RMDs, and a fat 401(k) balance kick in. Roth is usually the better bet early in your career.
A 60-second lesson on this, with a worked drill, lives inside the Finlo app. Free, forever, on the basics.