Trust Tuesday: Roth vs. Traditional IRA
Trust Tuesday: Roth vs. Traditional IRA
In our last post, we touched on how a mistake when transferring an IRA can trigger taxes and early withdrawal penalties, and how partnering with First Western can help you avoid those missteps. Now, we’re taking the conversation a step further by exploring the IRA options and planning considerations that can help you build a more confident path toward your retirement goals.
An IRA is an Individual Retirement Account and can be funded with pre- or post-tax dollars depending on the type of IRA you choose. The two main types of IRAs are Roth and Traditional. Regardless of which type you choose, IRAs are a great option to save for retirement, even if you already have a qualified retirement plan (like a 401(k)) through your employer.
While there are a few similarities between these types of IRAs, they have many differences. One of the similarities they have is the amount you can contribute, which in 2026 is $7,500 if under 50 years old or $8,600, if over 50.
Below is a breakdown of some of the key differences between the account types:
- Tax Breaks
The easiest way to comprehend how these two vary, is to understand that both offer tax advantages, but the primary difference lies in when you get the tax benefit. Contributions you make to a Traditional IRA could be tax-deductible now, which means you may not pay taxes on all or a portion of your contribution. When you start withdrawing funds after turning 59 ½ from your Traditional IRA, you will pay taxes on the amount you take out at that time.
While Traditional IRAs let you save on taxes now, Roth IRAs are funded with after-tax dollars. You don't get an immediate deduction, but the tradeoff is huge: your future withdrawals generally come out completely tax-free.
- Withdrawals
With a Traditional IRA, you are required to start taking required minimum distributions (RMDs) at age 73 and you could be hit with a hefty IRS penalty if you fail to do so. Also, if you want to take a withdrawal prior to turning 59 ½, there will likely be a 10% early-withdrawal penalty, and you’ll also be taxed on the amount taken.
With a Roth IRA, you don’t have mandatory withdrawals and, if you need, you can take a withdrawal prior to turning 59 ½ without any penalty as long as it is only the money you contributed, not funds from earnings or IRA conversions. Keep in mind - there is a stipulation that you must wait at least five years since you first contributed to any Roth IRA to begin taking withdrawals.
- Income Limits
If you have earned income, you may qualify to contribute to a Traditional IRA. However, if you participate in your employer’s retirement plan (i.e., 401k) or are over a certain income level, you may not get the full upfront tax break. Roth IRA contributions, on the other hand, have income limits. If you’re lucky enough to have a higher income, the government does may not allow you to make contributions directly into a Roth IRA.
If you would like to know how these limits apply to your specific tax situation, please contact your qualified tax professional for guidance.
Wondering what to do next? Here is a Simple Plan to Get Started
Connect - We start with a conversation to understand your goals, your current IRA, and your retirement plans.
Transfer - Our Trust Department helps guide the paperwork to ensure your IRA is transferred correctly and avoids unintended tax consequences.
Ongoing Support - Once your IRA is here, our team continues to keep you informed, so you understand how your retirement savings support your long-term plans.
Whether you are looking to open a new IRA, transfer an IRA, or review your retirement options, First Western is here to help. If you have other questions about IRAs, please contact our IRA Specialists:
701-857-7150