Understanding the Key Differences Between Roth IRA and Traditional IRA

Here are four quick, crucial reminders about the difference between a Roth IRA and a traditional IRA.

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Reminder #1: Roth IRA vs. Traditional IRA Returns

No, investing in a Roth IRA is not necessarily better than investing in a traditional IRA. Despite what all the TikTok gurus tell you, you are in a certain tax bracket today and you will be in that exact same tax bracket in 30 years when you draw down the money. Investing in a Roth versus investing in a traditional will give you the identical return. I've done the math and the math maths!

Reminder #2: Required Minimum Distributions

Yes, investing in a Roth is pretty cool in retirement because there are no required minimum distributions, unlike the traditional. This allows for greater flexibility regarding when to draw it down and is phenomenal for estate planning since you never really have to touch it.

Reminder #3: Income Limits for Contributions

No, you do not make too much money to contribute to a Roth IRA. You might make too much money to contribute directly to a Roth IRA, but you could contribute to a traditional IRA and then convert it to a Roth IRA, which has no income limits.

Reminder #4: Converting Traditional to Roth IRA

That said, if you're thinking about converting your life savings to a Roth IRA because a TikTok guru told you to, while you're at or near the height of your earning power, just know that the tax man is coming to get the biggest piece of pie they can while you're making the most money you possibly can. If you wait until retirement, odds are you'll be in a lower tax bracket and the tax man will leave feeling a little less satisfied. That's a good thing!

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