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Traditional vs. Roth IRA Tax & More

Choosing the Right Tax-Driven Retirement Savings Vehicle

Rehabilitation with a physical therapist

Planning for retirement is crucial, and Individual Retirement Accounts (IRAs) are powerful tools to help you achieve your financial goals. But with two main types - Traditional and Roth IRAs - choosing the right one can be confusing. It's not uncommon to use these two very different types interchangeably. Although both allow you to save for expenses later on in life, each has its benefits and drawbacks. This blog dives into their key differences and eligibility, along with a popular strategy for individuals who don't initially qualify for a Roth IRA.

Tax Treatment: The Core Distinction

The primary difference between Traditional and Roth IRAs lies in their tax treatment and this is extremely important to understand so pay close attention:

  • Traditional IRA: Contributions are often tax-deductible, lowering your current taxable income. However, withdrawals in retirement, including both contributions and earnings, are taxed as ordinary income. Think about that for just a second, you get a tax break right now when you're in a higher tax bracket. Your money will grow over time deferring the tax liability. Then one day Uncle Sam will come knockin to ask for his cut.

  • Roth IRA: Contributions are made with after-tax dollars, offering no upfront tax benefit. That's right, Roth IRAs get funded with money that's been earned and already taxed. You will get zero benefit from those contributions today. Zip, zilch, nada! But the magic lies in tax-free withdrawals in retirement, including both contributions and earnings, if you meet certain criteria (age 59 ½ and at least five years since the first contribution). Not everyone can do this so you'll want to work with your accountant or CPA to be sure you're following the rules of the road. Making mistakes can be costly and messy to clean up.


Anyone with earned income can contribute to both Traditional and Roth IRAs, but income limits apply to Roth IRA contributions. That's right if you're self-employed and your minor child works for you, they have the right to save as well. There is too much to talk about when it comes to self-employed folks so I'll save that for another time. If your income exceeds the limit (which changes annually), you can still leverage a strategy called a backdoor Roth IRA conversion. Doesn't sound legit, right? We'll reference that strategy with that name for the blog but it's not one the IRS takes a liking to and using it could leave you in hot water with them.

The ole switcharoo (AKA the Backdoor thing):

This strategy allows individuals who are ineligible to directly contribute to a Roth IRA due to income limitations to still benefit from its tax-free withdrawals. Here's how it works:

  1. Contribute to a Traditional IRA: Even if you exceed the Roth IRA income limit, you can still contribute to a Traditional IRA (within contribution limits). However, these contributions won't be tax-deductible. That's called making a non-deductible contribution. Who would want to do that you might ask. The answer, a lot of people!

  2. Convert to a Roth IRA: After waiting at least 5 days (to avoid any potential tax implications on earnings), you can convert the entire Traditional IRA balance (contributions and any earnings) to a Roth IRA. Since the initial contribution wasn't tax-deductible, only the earnings are subject to taxes during the conversion. However, if you wait at least five years from the first contribution to your Traditional IRA and are over 59 ½, even the earnings portion can be converted tax-free.

Bait n Switch On The Water

Focus on Investments, Not Account Type:

It's important to remember that the account type itself has no bearing on the actual performance of your investments. Sound clear to many, but not everyone knows or understands this which is why I point it out. Whether your Traditional or Roth IRA grows more depends solely on the underlying investments you choose and their performance over time. So, focus on building a diversified portfolio with investments aligned with your risk tolerance and time horizon, regardless of the account type.

Seeking Professional Guidance:

Choosing the right IRA and navigating strategies like backdoor Roth conversions can involve complexities. Consulting a qualified financial advisor, accountant or CPA is extremely important so you don't make a costly mistake. Your trusted professionals will help you understand your options, assess your eligibility, and create a personalized retirement savings plan tailored to your specific circumstances.

Ready to feel more confident about your financial future? Contact me, Constantine, from Monarch Wealth Management. Reach out today for a consultation. Let's work together to ensure your health and financial wellness remain a top priority.

If you haven't checked out my PennyWise Financial Podcast, watch a clip featuring a guest Dave Young, CPA, and owner of Young & Company CPAs, LLP here in Rochester, NY. Dave takes taxes seriously and knows what it takes to get things done. We chat about a variety of topics in this episode and he has a great delivery of the information. This guy enjoys handling the biggest of messes and more complex tax and business planning. If you have a straightforward return with a simple W-2, he may not be the right fit for you. Dave is passionate about a lot of things in life and taxes happens to be one of them.

Scroll down a little past the clip to watch the entire episode. It's available on all major podcast platforms like Apple Podcasts, YouTube Music, Spotify, Amazon Music, and YouTube.

👇Or click below to watch the full Episode

Everyone wants to offer advice. We hope you have the right person. A trusted person to guide you on your path to achieving your goals. If you're not working with the right team or want a second opinion, we hope you consider our services. Follow our content to learn more about our process, and investment philosophy and hear real-life accounts of what our clients are dealing with and how we help them.

And that's only the beginning. Reach out and schedule a consultation to discuss your situation. We'll walk you through your options and help you make the right choice for your goals. Click below to listen to the latest PennyWise Financial Podcast and hear more commentary on the stuff you need to know, and much more. Check out another episode below or view our catalog of videos by clicking the button linked to our channel.

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