Investing Retirement Planning IRAs Roth IRAs Choosing a Traditional or a Roth IRA By Miriam Caldwell Miriam Caldwell Miriam Caldwell has been writing about budgeting and personal finance basics since 2005. She teaches writing as an online instructor with Brigham Young University-Idaho, and is also a teacher for public school students in Cary, North Carolina. learn about our editorial policies Updated on December 10, 2020 Reviewed by Thomas J. Brock Reviewed by Thomas J. Brock Thomas J. Brock is a CFA and CPA with more than 20 years of experience in various areas including investing, insurance portfolio management, finance and accounting, personal investment and financial planning advice, and development of educational materials about life insurance and annuities. learn about our financial review board Share Tweet Pin Email In This Article View All In This Article Traditional IRA Pros and Cons Roth IRA Pros and Cons Choosing the Best IRA for You Rolling a 401(k) Into an IRA Opening a New IRA Photo: Klaus Vedfelt / Getty Images It can be difficult to choose between a traditional IRA and a Roth IRA. You may be wondering which type of IRA that you should open. There are advantages and disadvantages to both types of IRAs. Learn the basics of both a traditional and Roth IRA—and which is right for you. Advantages and Disadvantages of a Traditional IRA A traditional IRA can be a good option if you are looking to lower your taxable income. The contributions are tax-free, but you will pay taxes on your withdrawals. The major disadvantage is that you will pay taxes on more money since your money will grow once you invest it. However, you may be paying at a lower tax rate since you will likely be earning less once you are retired. Advantages and Disadvantages of a Roth IRA A Roth IRA allows you to contribute money, but you are taxed on it. However, you will not be taxed on the withdrawals. This option does not lower your taxable income, but it does allow you to pay taxes on a lower amount of money since you are paying on your contributions instead of your withdrawals. This is a good option if you want to lower the amount that you pay in taxes once you retire. Keep in mind that there are salary caps on those who can open a Roth IRA. This limit is less than $140,000 in 2021. Choosing the Best IRA for You You should consider not just your income as it relates to the income cap, but also when you would like to be taxed on your contributions—either when you make a contribution or when you make a withdrawal. You should talk to your accountant or financial adviser to make sure that this choice really is the right one for you. If you feel you need the tax deduction, consider looking for other deductions or other ways to lower your taxable income. Note It is important to take a long-term view when you consider the best IRA to open. Bank IRAs offer security while investment firm IRAs offer the chance for more growth. Each individual situation is slightly different and if you are unsure, it definitely helps to talk to your financial adviser or accountant. Considerations When Rolling a 401(k) Into an IRA If you are trying to roll your 401(k) into an IRA, you may choose to keep it in the same type of account. Some companies only offer traditional 401(k)s. If you were to switch it to a Roth IRA, you will need to pay the taxes on the entire amount you are rolling over immediately. If you have the cash on hand, it can save you a lot in taxes in the future, but if you don't it may be easier to just roll it into a traditional IRA. When you are rolling a 401(k) over, what you are rolling over does not count against your contribution limits. Opening a New IRA When you open your IRA, you should choose an investing firm over a bank. The investing firm will allow you to invest in mutual funds or stocks. These options offer more potential growth for your investment than you would get if you opened the IRA with CDs. When you are in your twenties, you have time to ride out the market, and you should invest more aggressively. However, your investments should grow more conservative over time. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Internal Revenue Service. "Amount of Roth IRA Contributions That You Can Make For 2021." Accesed Nov. 1, 2021.