Saving more for retirement with an Individual Retirement Account (IRA) can be a smart financial choice. And for those of us saving for multiple financial goals at once, an IRA can offer more flexibility than an employer-sponsored retirement plan.

Which Type of IRA is Right for Me?

Deciding to save for retirement with an IRA is the first decision you’ll need to make, but it isn’t the only one. You also need to decide which type of IRA is right for you: a Roth IRA or a Traditional IRA.

Both have the same contribution limit of $6,000 per year, with an additional $1,000 catch-up contribution allowed for those age 50 or older (for the 2019 tax year).

Both will also allow you to withdraw money at any time without penalty for certain expenses, including:

• Qualified education expenses for you, your spouse, your child or grandchild
• Buying or building your first home (up to $10,000)
• Unreimbursed medical expenses
• Birth or adoption of a child

But that’s where the similarities end. Your eligibility to open an account, when taxes on contributions and withdrawals are paid, and your ability to withdraw your contributions for emergencies are very different depending on which option you choose.

Key differences between a Roth IRA and a Traditional IRA

	Roth	Traditional
Eligibility	You must be earning taxable income, but income limits do apply. The IRS sets these limits each year.	You must be earning taxable income. There is no income limit.
Taxes on Contributions	Your contributions are made with post-tax money and no tax deduction is available.	Your contributions might be tax deductible if neither you nor your spouse have an employer-sponsored retirement plan and/or you meet certain income requirements. See IRS rules on deducting IRA contributions.
Early Withdrawal (Before Age 59½)	You can withdraw your contributions at any time for any reason, without penalty or need to pay income tax. However, if you withdraw the earnings on your contributions, you will pay a 10% penalty and income tax.	You will pay income taxes on the amount you withdraw and a 10% penalty may apply.
Taxes on Withdrawals (After Age 59½)	Withdrawals are tax-free, so long as your account has met the 5-year holding period requirement.	You will have to pay income taxes on any withdrawals.
At Age 72	So long as you still meet the eligibility requirements, you can continue to contribute. There are no required withdrawals.	You must start taking Required Minimum Distributions (RMD) from your Traditional IRA by April 1 of the year following the year in which you reach age 72 (or 70½ if you reach age 70½ before 12/31/2019). RMD rules are set by the IRS.

Do I have to choose just one?

The good news is that while it’s important to understand the differences between the two types of IRAs, you don’t actually have to choose between them. In fact, as you progress through your career, you may find that what was the right choice for you one year, may not be the best option the next year.

For example, if you are just starting out in your career, you may think you have to choose between building an emergency fund or saving for retirement. In that case, the ability to withdraw contributions without penalty if an emergency does arise may convince you that a Roth IRA is the way to go.

On the other hand, if you are in your peak earning years, you may be in a higher tax bracket than you are likely to be in during your retirement years, which may make the pre-tax contributions of a Traditional IRA more appealing.

You can even fund both a Roth IRA and a Traditional IRA in the same tax year, but that doesn’t mean you can save twice as much! The IRS annual contribution limit applies to all your IRA accounts combined.