The primary difference between Roth and Traditional IRAs is in how they are taxed. While you can generally take a tax deduction on contributions, your withdrawals are fully taxable. A Roth IRA works in almost the exact opposite fashion. You won’t get a tax deduction on money you put in, but your qualifying withdrawals are tax-free.
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While both can be good choices if you’re looking to build a retirement nest egg, one is generally a better option if you’re young.
Why a Roth Wins the Race for Younger Investors
The structure of the Roth IRA is particularly advantageous for those just starting out in their work careers. Here’s why:
- A tax deduction on contributions may not be particularly valuable: When you’re just starting out at work, you’re likely earning the lowest salary of your career, meaning you’re in the lowest tax bracket. Tax-deductible contributions are worth more for those in the higher tax brackets.
- The longer you can build the value of your account, the more valuable the tax-free withdrawals of a Roth IRA become: If you’re just starting out, you likely have more than 30 years to build your nest egg before you take any withdrawals. By retirement age, you could very well have a large balance at your disposal. Being able to withdraw that money on a tax-free basis can give a huge boost to your retirement lifestyle.
- You can use a Roth IRA as an emergency fund: While it’s always advisable to keep your money in your retirement account as long as possible, the Roth IRA allows you to withdraw your contributions at any time without any taxes or penalties. This means you can take some money out of your Roth IRA without consequence if you’re in a serious financial crisis.
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Another advantage of a Roth IRA, regardless of when you start contributing to one, is that they don’t have any required minimum distributions (RMDs), as Traditional IRAs do. This means that you never have to take any money at all out of a Roth IRA, allowing you to have more flexibility in terms of when you withdraw from your retirement account. With a Traditional IRA, you’re forced to take RMDs, which not only remove your ability to control your cash flow but also create a tax liability.
Note that if you have a very high modified adjusted gross income (MAGI), you may not be able to contribute to a Roth IRA. But this is rare for those just starting out in the workforce. The MAGI limit for single tax filers, for example, is $165,000 for 2025, according to TIAA. A partial contribution is allowed for those with an MAGI between $150,000 and $165,000.
Situation in Which a Traditional IRA May Still Be Better
Although the scales tilt in favor of a Roth IRA for those just entering the workforce, this isn’t to suggest that a Traditional IRA doesn’t still have value. In fact, even for new workers, there is a specific scenario in which a Traditional IRA may still be a better option.
If you start your career with a very high-paying job, contributing to a Traditional IRA might be a better option. The reason is you may be able to take advantage of a bigger tax deduction. This, in turn, can help free up your cash flow for other investments — or even the financial obligations that come with being new to the workforce.
Of course, there’s a caveat to this. Per the IRS, once your modified adjusted gross income exceeds a certain level, you may not be able to take a tax deduction on contributions to a Traditional IRA. There are a lot of variables determining the limits, including whether or not you are covered by a retirement plan at work. But if you’re a single individual covered by a retirement plan, for example, you can’t take a deduction on your Traditional IRA contributions if your MAGI is $89,000 or more, per TIAA.
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This article originally appeared on GOBankingRates.com: As You Start Your Work Career, Which Is a Better Option — Traditional IRA or Roth IRA?
