Roth IRA Benefits: Roth IRA vs Traditional IRA Accounts | U.S. Bank (2024)

You know that putting money away for retirement is a smart financial strategy, and savvy investors maximize earnings while minimizing taxes. A Roth IRA could be an important part of your investment portfolio, especially if you expect to be in a higher bracket when you’re ready to retire.

A Roth IRA is one type of IRA account. Roth IRAs are funded with after-tax dollars and contributions grow tax free. Roth IRA withdrawals are also tax free if you’ve held the account for at least five years and are age 59½, or if you’re withdrawing Roth IRA contributions only. Anyone with a qualifying income level can invest, even if they’re covered through a workplace retirement plan, like a 401(k) or 403(b). Contributions to Roth IRAs, however, are not tax-deductible.

Below, learn more about Roth IRA benefits, how a Roth IRA works and how a Roth IRA may fit into your retirement plan.

What are the 2023-2024 Roth IRA contribution limits?

The maximum total annual contribution to all your traditional and Roth IRAs for tax year 2023 is $6,500, or $7,500 if you’re 50 or older.

For the 2024 tax year, the maximum contribution amount is $7,000 ($8,000 if you're 50 or older). You can make contributions for 2023 up until the 2024 tax deadline.

What is the difference between a Roth IRA and traditional IRA?

It’s possible to have both Roth and traditional IRAs in your investment portfolio. You can contribute to both as long as your total contributions don’t exceed the annual limit.

Both types of IRAs also have similar withdrawal rules. When you compare them, however, you’ll see they’re different in a few important ways.

A traditional IRA is a tax-deductible, tax-deferred account. You don’t pay any taxes on the portion of your income you deposit into a traditional IRA, and you aren’t taxed on the earnings your investments gain while they remain in the account. With a traditional IRA, you pay taxes when you withdraw money in retirement, based on your current tax bracket. Once you reach age 73, you’ll need to take required minimum distributions (RMDs).

A Roth IRA, on the other hand, is a tax-free retirement savings account funded with after-tax dollars. While contributions to this account are not tax deductible, you’re not taxed on qualified distributions when you withdraw funds during retirement.

What are the benefits of a Roth IRA?

While traditional IRAs may provide immediate tax breaks because they’re deductible and funded with pre-tax money, Roth IRA benefits happen on the back end, as earnings and withdrawals are not taxed. This structure can offer an advantage to younger investors who may be in a lower tax bracket now than at retirement.

Account holders can withdraw their Roth IRA contributions at any time free of tax and penalties; however, tapping into Roth IRA earnings before age 59 ½ will incur penalties and taxes.

Another advantage of Roth IRAs is that they don’t have required minimum distributions (RMDs), which can be beneficial during a down market. You can also pass a Roth IRA to beneficiaries.

What is the income limit for a Roth IRA?

Your modified adjusted gross income and tax filing status determine the annual amount you can invest in a Roth IRA.

According to IRS 2023 tax year limits, single taxpayers can earn up to $138,000 to contribute the maximum amount. Those who earn between $138,000 and $153,000 can contribute a prorated phased-in amount. Those who are married and file jointly can earn up to $218,000 to contribute the maximum amount. If the couple earns between $218,000 and $228,000, they can contribute a phased-in amount.

Income limits increase for the 2024 tax year. Individual tax filers earning up to $146,00 can contribute the maximum amount; those who earn between $146,000 and $161,000 can contribute a prorated phased-in amount. Married couples filing jointly can earn up to $230,000 to contribute the maximum amount, and between $230,000 and $240,000 to contribute a phased-in amount.

Is it a good idea to convert an IRA to a Roth IRA?

If you have a traditional IRA account, it’s possible to convert it to a Roth IRA account to take advantage of tax-free growth. Converting a traditional IRA to a Roth IRA is a taxable event; however, Roth conversions can be a smart strategy in a few situations, such as:

• If you’re currently in a lower tax bracket than you may be in the future, especially if you expect to hit an income level where Roth IRA accounts are phased out or not allowed.
• If you don’t need the funds but would be required to take them due to RMDs or are leaving assets to heirs and want to help reduce their tax burden.
• If you can pay the taxes upfront without disrupting your asset portfolio.
• If your portfolio’s value is down.
• If you earn more than the Roth IRA income limits and can take advantage of “backdoor” Roth IRAs, which allow you to move money from a traditional IRA to a Roth IRA without restrictions.

However, Roth conversions may not be the best choice in some situations, including:

• If you need the funds in the near future. Roth conversions have a five-year holding period.
• If you aren’t confident that you’ll be in a higher tax bracket during retirement.
• If you must liquidate assets that are currently earning strong returns to pay the taxes due at conversion.
• If you’re considering moving to a state with lower or no state income taxes when you retire.

The decision to convert a traditional IRA may be complex. Talk with your tax advisor or financial professional to determine if a Roth conversion is right for you.

Whether you prefer investing on your own or want personal investment guidance, we have an option to fit your needs. Learn how to open an IRA.