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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.

By
Laura Adams, MBA
6-minute read
Episode #393

Question #3: Do I Want Flexibility to Tap the Account Before Retirement?

Tapping a retirement account before you reach the official retirement age of 59½ typically comes with having to pay tax, plus a 10% early withdrawal penalty.

While you might think it’s unfair to have your wrist slapped, financially speaking, to access your own money, the purpose is to make sure you have funds to spend in retirement - not before!

However, there are some exceptions. Roth accounts give you much more flexibility than traditional ones when it comes to taking early withdrawals. And a Roth IRA, in particular, gives you the most access to your money.

Here are the rules for taking withdrawals from different accounts before reaching age 59½:

Traditional workplace retirement plans: may allow “hardship” distributions to pay for medical, funeral, or education expenses only. However, you must pay income tax on this, plus, in most cases, an additional 10% penalty. 

Roth workplace retirement plans: may also allow “hardship” distributions to pay for medical, funeral, or education expenses. But as long as you’ve owned a Roth account at work for 5 years, you can withdraw contributions (but not earnings) tax-free. That’s because you pay tax upfront on Roth contributions.

Traditional IRAs: allow you to withdraw funds at any time, but require you to pay income tax plus the 10% penalty, unless you use them to:  

  • Buy, build, or rebuild a property that will be your first home, for up to $10,000
  • Pay medical expenses that exceed 10% of your adjusted gross income 
  • Pay health insurance premiums while you’re unemployed  
  • Pay higher education expenses

Roth IRAs: allow you to withdraw contributions (but not earnings) tax-free, as long as you’ve owned the account for 5 years. And if you haven’t owned a Roth IRA that long, the exceptions to the 10% early withdrawal penalty that I mentioned above for a traditional IRA also apply. You can use early withdrawals from a Roth IRA to pay for a first home, medical, education, and health insurance and avoid the penalty.

While I recommend leaving retirement accounts untouched until you retire, having a Roth IRA does give you the most flexibility to tap your funds ahead of retirement. So if you’ve got a long way to go and are worried that you might need to spend some of your retirement savings, a Roth IRA is a good option.

In addition to these 3 questions I’ve covered, there are other features of traditional and Roth retirement accounts that may be important for your situation. For instance, whether you, or a spouse, have a retirement account at work could reduce the tax deductibility of a traditional IRA, depending on your income. Or whether you want flexibility for taking distributions during your retirement.

For a summary of all this information, plus more pros and cons of different retirement accounts, click here to download the Retirement Account Comparison Chart

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Retirement Jar image courtesy of Shutterstock

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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-Hustlersbook 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.