Introduction to IRAs in Retirement Planning
Saving for retirement remains a priority for many individuals.
Many Americans accumulate funds for their later years through employer-sponsored plans and personal accounts, with traditional and Roth IRAs serving as common options in the individual category.
Features of Roth IRAs
Roth IRA holders make contributions using after-tax dollars.
For 2025, the IRS sets contribution limits at $7,000 for those under 50 and $8,000 for those 50 and older.
Withdrawals of contributions from a Roth IRA incur no taxes or penalties. However, earnings withdrawn before the account has been open for five years or before the holder reaches age 59½ may face taxes and penalties, according to Fidelity.
Why a lot of people like a Roth IRA today is that you pay income taxes today before you put the money into the Roth IRA. The money grows tax-deferred while it’s inside of the Roth IRA, but the great news about a Roth IRA is you never, ever pay any tax when you take it out, so it’s basically taxed once today and then you’re never ever taxed again.
Features of Traditional IRAs
Contributions to traditional IRAs are generally not taxed until distributions occur, per the IRS.
In 2025, individuals under 50 can contribute up to $7,000, while those 50 and older can contribute up to $8,000.
Contributions may be tax-deductible, but this depends on factors such as participation in a workplace retirement plan.
Withdrawals from traditional IRAs can be made at any time, but they are included in taxable income and may incur a 10% additional tax if taken before age 59½, according to the IRS.
Traditional IRA holders must take required minimum distributions each year starting at age 73.
Just like a Roth IRA, the dollars grow tax-deferred. However, on all that growth in the traditional IRA, ultimately you’re going to be taxed when you take it out down the road.
If you don’t, or your spouse does not, then you can fully deduct the traditional IRA. But if you have one at work, then there’s a phase out income-wise on how much income you have as to whether or not it’s deductible.
Comparing Traditional and Roth IRAs
The distinctions between traditional and Roth IRAs provide important considerations for retirement savers when selecting an account.
One key factor is the timing of taxation: paying taxes now versus later.
Younger individuals, often in lower tax brackets, may benefit from Roth IRAs since funds grow tax-free indefinitely.
The Secure 2.0 Act, enacted in late 2022, affects inheritance. For traditional IRAs, non-spouse heirs must withdraw funds within 10 years, while Roth IRA heirs have more flexibility.
When you have a traditional IRA and you die and it goes to your kids or any other non-spouse inheritor, you have to take the money out of a traditional IRA within 10 years. In a Roth IRA, when you die and your kids inherit the Roth IRA, they can take it out as long as they want. They’re not subject to that 10 years.
Considerations and Statistics
When deciding between a traditional or Roth IRA, individuals should evaluate their ability to leave funds invested long-term, their current tax bracket, and their estate planning goals for family.
A study by the Investment Company Institute released Thursday indicates that nearly 44% of American households held IRAs in mid-2024, including traditional, Roth, employer-sponsored, or combinations.
Traditional IRAs were held by 32.6% of households, while over 26% had Roth IRAs.
A February report from Fidelity Investments showed average IRA balances of $127,543 in the fourth quarter of 2024, up 8% from the previous year.
My lean on this would be that more and more people should be looking at opening up a Roth IRA versus a traditional IRA.
