Many of us dream of that magical time when we can spend our days as we please rather than having to worry about earning a paycheck. But while the average American will spend roughly 20 years in this life stage, only about half have actually calculated how much they need to save for it.^{Disclosure 1}

Different IRA options

An IRA is a personal retirement savings plan with specific tax implications. Even if you’re contributing to a 401(k) or another plan at work, there are benefits to also contributing to an IRA.

Within the IRA category, there are two IRA options: Roth and traditional. A Roth IRA is funded with post-tax income, which means you don’t pay any taxes when you make withdrawals after age 59 1/2. A traditional IRA can be funded with pre-tax income, but you typically pay taxes later when you make withdrawals after you retire. Both types of IRA have a maximum contribution limit of $7,000 for people ages 50 and under. For those over 50, the contribution limit is $8,000.

So, would you rather pay taxes now or later? Let’s break down the differences between Roth and traditional IRAs to help you decide which might be best for you.

Maximize your retirement contributions.

“When people ask me about Roth versus traditional, I first ask them if they’re maxing out their tax-advantaged retirement accounts. If they’re not, I let them know they should put more brain power into that,” says Brian Ford, head of financial wellness at Truist. He says increasing your retirement contributions or maxing them out will have a bigger impact for you in the long run than choosing between Roth or traditional accounts.

While maxing out retirement accounts each year may not be a realistic option if you’re juggling multiple financial priorities, you can still make good progress. Here are three tips:

1. Start small with your savings and ensure that you’re at least contributing as much as your employer will match.
2. Automate your contributions so you don’t have to think about it each month.
3. Come up with a strategy to tackle debt or any other obligations that are keeping you from investing more for your retirement.

How to choose the IRA that works best for you

When choosing between a Roth and a traditional IRA, consider the tax implications.

With a Roth IRA, you basically give up a tax break in the present in exchange for not having to pay taxes in the future. But is a Roth IRA better than the traditional option? While some argue income taxes may be higher in the future, no one can actually predict the future—so there’s no way to say for sure whether you’ll pay a higher or lower tax rate later than you would now.

“There is not a right answer,” Ford says. “Some people don’t like to hear that, but the reason why is that we don’t know what the tax rates are going to be 20 or 30 years from now. If we knew that, the math would be very clear.”

Ultimately, you do have to pay taxes at some point. But generally speaking, Ford says you should base your decision about Roth versus traditional accounts on what makes you feel the best.

Do you want to pay your taxes now and know that the amount you’ve saved is fully there for you down the road? Or do you want to see that number go as high as it can—knowing that you’ll pay income taxes on it later?

“You can’t go wrong either way,” Ford says. “The difference between Roth and traditional is not that big of a deal. What is a big deal is the fact that you’re going to put money into one of these things—pick one of them and do it and max it out.”

Other considerations with IRAs

The key benefit to the Roth IRA is that your money grows tax free over time as long as you meet certain requirements. You can make withdrawals from a Roth IRA at any time, but earnings distributed before you are 59 1/2 could be subject to a 10% penalty and income taxes, unless you meet an exception.

Some circumstances might allow you to make penalty-free withdrawals, including health insurance premium payments while unemployed; unreimbursed medical expenses; higher education fees; and buying, building or rebuilding a home for first-time homebuyers.^{Disclosure 5}

When it comes to retirement distributions, there are no required minimums with a Roth IRA. On the other hand, traditional IRAs do require minimum distributions once you’ve reached age 73. A financial advisor can help you think through the considerations so you can make the best decision. One other consideration: Once your account is established, you can also make investments in your IRA. A financial advisor can help with this, too.

Podcast episode: Listen to “Do I need a financial advisor?” from Money and Mindset With Bright and Brian.

Another option: Contribute to both

The IRS allows contributions to both a Roth IRA and a traditional IRA. Keep in mind that Roth contributions count toward your taxable income for the year. Because of this, Ford says he knows some high earners who will adjust how much they’re contributing to each based on what their taxable income for the year is.

“Some people say, ‘Look, I made a little more money this year, and it’s going to bump me up into this new bracket.’ And they’re like, ‘Boom, traditional IRA—I want to save on those taxes now,’” Ford says. “And they can go back and forth between traditional and Roth depending on where they’re at with their income and what taxes are doing that year and so forth.”

In any given year, depending on your situation, you could potentially keep yourself in a lower tax bracket by contributing more to a traditional account instead of a Roth. But that strategy is pretty niche—what’s most important for you and your future well-being is that you simply save as much as possible.