Roth vs Traditional IRA: The Differences & Which is Right for You

Many of you may not be thinking of retirement yet, but if you’ve listened to 100 years by Five for Fighting or 1985 by Bowling Soup then you know that the years pass by faster than you could ever imagine. That’s where an IRA (Individual Retirement Account) comes in. If you want to live out your golden years, sipping martinis on the deck of your Miami Beach condo, an IRA could help get you there.

What Is An IRA and Why Is It So Great?

As mentioned earlier, an IRA is an Individual Retirement Account and is created with the prime focus of allowing individuals to save for retirement. If you’re wondering about what makes an IRA so great, it’s the tax benefits that come with it. Unlike other retirement funds, IRAs offer account holders attractive tax breaks, allowing them to save money. More money= more martinis.

Choosing an IRA That Is Right For You!

There are different kinds of IRAs which each have their own tax advantages, so listen up. Two of the most common ones are Traditional and Roth IRAs. Traditional IRAs allow individuals to contribute and earn money on their retirement funds, tax-free. Roth IRAs don’t include tax breaks on contributions, but withdrawals upon retirement are not taxed.

It all comes down to a game of logic, luck, and numbers. Let’s explain.

Roth vs Traditional IRA

It’s no secret that the future is unpredictable. Just ask anyone who’s ever relied on the horoscope column in Cosmopolitan Magazine. That’s why making decisions about what kind of IRA to pursue shouldn’t be just about intuition or logic, but a mixture of the two.

As a reminder, individuals who choose Traditional IRAs don’t pay any taxes on the investments inside their retirement account, until they actually withdraw the funds. Roth IRAs work the exact opposite. Owners pay taxes on the money they deposit into the account but at withdrawal, funds are tax-free.

So without completely leaving these decisions to fate, how does one actually choose between Traditional and Roth IRAs? There are certain guidelines and tips that can help you ultimately decide what works best for you. For example, Roth IRAs can be a good option for those who are planning on retiring in a state with higher income taxes (a.k.a. Connecticut) or if there’s reason to suspect that income taxes in your current state will increase upon retirement.

If you do choose to open a Roth IRA, keep in mind that contributions can be capped for single account owners making more than $139,000 annually and married couples earning $206,000.

This cap, which limits contributions to $6,000 for owners under 50 and to $7,000 for those over 50, applies to Traditional IRAs as well.

These should be our only problems.

Self- Directed IRAs (SDIRAs)

But wait, we’re not done yet. There’s also another option, called a Self-Directed IRA (SDIRA). SDIRAs allow account holders to maintain alternative investments like real estate and commodities, which are not allowed in standard IRAs.

Sounds like a pretty good loophole, right? But like any loophole, there are always catches to be aware of. Managing SDIRAs can be a bit more complicated than other IRAs.

Keep this in the back of your mind when choosing what kind of institution you want to manage your funds. Let’s break it down for you.

Who Should Manage My IRA?

Managing an IRA is kind of like doing laundry. Darks, whites, and wool all require different care techniques. The same goes for Traditional, Roth and Self-Directed retirement accounts.

If your priority is saving money (and let’s be real who’s isn’t) it’s probably better to go down the brokerage firm route when it comes to managing your IRA. That’s because banks typically charge higher rates than traditional brokerage firms.

What are Custodians?

Authorized by the Internal Revenue Service, custodians are financial institutions that safeguard IRA funds from theft or loss. Imagine a young Arnold Schwarzenegger standing in front of a very large black safe.

But like bodyguards, custodians are only inclined to offer their services to high-net-worth clients. Like all of us, custodians HATE paperwork, which is why they are typically not willing to manage private IRA accounts.

When it comes to custodians and Self-Directed IRAs, it’s a little more complicated.

Alternative investments are considered more challenging and difficult for custodians to operate. That’s why account holders typically rely on intermediaries to facilitate between them and custodians.

These intermediaries, known as administrators and facilitators, consist of non-bank trust companies that are authorized by different states. However, not all states allow facilitators to oversee IRA accounts on behalf of custodians.

SDIRAers, Beware of the IRS

“Hi, this is Sarah calling from the Internal Revenue Service”, is not the kind of phone call you want to get on a Monday morning.

That’s why it’s especially important to be careful and adhere to the IRS’ rules and regulations when opening an SDIRA.

SDIRA owners can rely on any of the traditional IRA custodians to manage their accounts, but keep in mind that it’s very easy to violate the IRS’s terms and the penalties are very, very steep.

Write this down and put it on your fridge. You are not allowed to benefit directly from your investments before retiring. Ignoring this rule can get you into “Titanic” kind of trouble.

How Much Should This Cost?

Each custodian has its own set of fees that they charge.

When choosing a custodian, remember that most account owners are fans of no-load funds, which sell shares without taking a commission. In contrast, customers usually avoid custodians like the plague, who charge maintenance fees.

What About Customer Service?

You know bad customer service can be more painful than living with dial-up if you were ever on hold for an hour with an internet company.

Navigating an IRA can sometimes be frustrating or challenging, which is why good customer service should be a priority when choosing a custodian.

Most custodians employ professionals with years of experience but not all custodians are equal when it comes to customer satisfaction.

And finally……

There’s No Such Thing As Too Much Research

This is definitely one of those times that you should do your homework.

When opening an IRA, take the time to speak with potential custodians about how their experience, services, and specialists can benefit your investment.

This is your future we’re talking about and if we’ve learned anything from the Bachelor franchise, making hasty decisions never ends well.

*MWMfund or any of its associates are not registered investment advisors or tax professionals. This is for educational purposes only.

*Investing is risky and you can lose all of your money

*Do your own research and always seek advice from a professional.

Have questions about investing with MWMfund? Reach out to us at

Be sure to check out The MWMfund Learning Center for more educational content.

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