Traditional vs. Roth IRA: Where Should Your Retirement Savings Go in 2024?

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Different retirement plans offer different benefits. Read on to see which is optimal for you. 

If you don’t need your entire paycheck in 2024 to cover your living expenses, then it pays to put some of that money aside for your retirement. And while you could save in a 401(k), if you don’t have access to one through an employer, then a good bet is to look to fund an IRA.

For salaried workers, IRAs come in two main varieties — traditional and Roth. If you’re self-employed, there may be other IRA types you can access.

Whether you’re saving in a traditional IRA versus a Roth, in 2024, the contribution limits are the same. If you’re under 50, you can sock away up to $7,000. If you’re 50 or older, you get a $1,000 catch-up contribution that raises your limit to $8,000.

And just so there’s no confusion, you don’t need to be lacking in retirement savings to take advantage of catch-up contributions in an IRA. All you need to do is be 50 or older. And if you’re not yet 50 at the start of 2024, you can still contribute up to $8,000 as long as you’ll turn 50 at some point next year.

You may be torn between funding a traditional IRA and a Roth IRA. And you should know that there are income limits associated with Roth IRAs.

For the purpose of this discussion, we’ll assume you don’t earn too much to contribute money to a Roth. With that in mind, here are some questions to ask yourself to determine where your savings should go.

1. Do I need the upfront tax break?

With a traditional IRA, the money you contribute goes in tax free, thereby shielding some of your income from taxes. With a Roth IRA, you don’t get a tax break on contributions. Instead, you get tax-free withdrawals in retirement, whereas with a traditional IRA, withdrawals are taxed.

Also, traditional IRAs give you the benefit of tax-deferred investment gains. But in a Roth IRA, those gains are tax free.

This means that if you contribute $50,000 to your Roth IRA over time and your balance grows to $150,000, you walk away with $100,000 in gains without having to pay a portion to the IRS. If that happens in a traditional IRA, you pay taxes on that $100,000 in gains, but it will be paid incrementally as you take withdrawals.

If you need the upfront tax break to be able to part with some of your earnings, then a traditional IRA might be best for you in 2024. But if you can swing retirement plan contributions without that tax break, then you may want to learn toward a Roth IRA. That way, you’ll give yourself more financial freedom later in life by virtue of not having to pay taxes on at least some of your senior income.

2. Is my tax burden higher now, or will it be higher later?

If you contribute to a Roth IRA in 2024, you’ll be paying taxes on your contributions at your current tax rate, which is based on the tax bracket you fall into. If you think your tax rate will be higher in 2024 than it is in retirement, then a traditional IRA could make sense. But if you think your tax rate in retirement will be higher, then a Roth IRA makes more sense.

Basically, what you want to do is snag your tax break at the time when it’s likely to result in the most savings. So let’s say you’re single earning $40,000 a year in 2024. That puts you in the 12% tax bracket.

If you expect to have more income in retirement between savings, part-time work, and Social Security, then it’s conceivable that you’d end up in a higher tax bracket later in life. So in that case, what you’d want to do is fund a Roth IRA in 2024 and pay taxes on your contributions to the tune of 12%. Chances are, you’ll be looking at a higher tax rate in retirement between an uptick in personal income and the potential for tax rates to generally rise across the board over time.

All told, saving in any type of retirement plan is a great thing to do for your retirement. And if you’re not sure which type to choose, you could always split your contributions between a traditional IRA and a Roth. That way, you can enjoy some immediate tax savings while also setting yourself up for tax-free withdrawals down the line.

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