Which is Best: A Roth or Traditional Retirement Account?

Money Girl details what to know when choosing between a Roth or traditional retirement account - no matter if you use an IRA, a retiremment plan at work, or both. Plus, get the Retirement Account Comparison Chart to see how all the accounts stack up.

Laura Adams, MBA
6-minute read
Episode #393

Last week, I wrote about common IRA mistakes that keep you from building wealth for retirement. One of the missteps is getting stuck on the choice between a traditional or Roth account.

As more employers add a Roth option their 401k, 403b, or 457 plans, you may also be faced with the traditional versus Roth dilemma for your workplace retirement plan. In fact, I recently received several questions on this topic from Money Girl Podcast listeners.

Choosing the right type of retirement account can be confusing—especially because the Roth rules for workplace plans are slightly different than the Roth rules for IRAs.

So in this episode, I’ll explain what you need to know about going with a Roth or traditional account, no matter if you invest for retirement using an IRA, a workplace account, or both.  

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Should I Have a Roth or Traditional Retirement Account?

There are several key differences between Roth and traditional retirement accounts. Which one you choose affects important issues like taxes on your contributions and withdrawals, and options for tapping funds early, if needed.

For a quick review, IRA is short for Individual Retirement Arrangement. You own one as an individual, and choose your own investments. For 2015, you can contribute up to $5,500 (or $6,500 if you’re over age 50) to one or a combination of IRAs.

Retirement plans through work, such as a 401k or 403b, are completely different from IRAs. They’re managed by employers only, offer a set menu of investment options, and require contributions to be deducted out of your paycheck. For 2015, you can contribute up to $18,000 (or $24,000 if you’re over age 50) to most workplace retirement plans.

Free Resource: Retirement Account Comparison Chart (PDF download)

To know whether you’re better off owning investments in a traditional or Roth retirement account, start by answering these 3 questions:

Question #1: What’s My Current Income?

This is the first question to answerm because there are annual income limits to qualify for a Roth IRA. However, this isn’t the case for a Roth account at work, or any type of traditional retirement account.

So, if your income is above the annual allowable limit, you’ll be locked out of opening up or contributing to a Roth IRA. Here are the thresholds by tax filing status for your modified adjusted gross income:

  • Married filing jointly: $193,000 
  • Qualifying widow(er): $193,000 
  • Single: $131,000 
  • Head of household: $131,000 
  • Married filing separately (not living together): $131,000 
  • Married filing separately (living together at any time during the year): $10,000


About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.