A Roth IRA or 401 (k) makes more sense if you are sure you have a higher income in retirement than you do today. If you expect your income (and tax rate) to be lower in retirement than you do today, a traditional or 401 (k) IRA is probably the best option. To determine which Roth IRAs are the best overall, Select reviewed and compared more than 20 different accounts offered by domestic banks, investment firms, online brokers and robo-advisors. For the purposes of this ranking, we focus solely on Roth IRAs, although the best providers often overlap with those offered by major traditional IRAs.
Read Select's list of the best traditional IRAs. See our methodology to learn more about how we choose the best Roth IRAs. No matter what stage of life you're in, it's never too early to start planning for retirement, as even the small decisions you make today can have a big impact on your future. While you may already be investing in an employer-sponsored plan, an individual retirement account (IRA) allows you to save for retirement and possibly also save on taxes.
There are also different types of IRAs, with different rules and benefits. With a Roth IRA, you contribute money after taxes, your money grows tax-free, and you can generally make tax-free and penalty-free withdrawals after age 59 and a half. With a traditional IRA, you contribute dollars before or after taxes, your money grows tax-deferred, and withdrawals are taxed as current income after age 59 and a half. Your earnings from contributions to a Roth IRA depend on the associated fees, contributions you make to your account, and market fluctuations.
On the contrary, you can withdraw sums equivalent to your Roth IRA contributions, without penalties or taxes, at any time, for any reason, even before the age of 59 and a half. By comparison, contributions to Roth IRAs are not tax-deductible, but retirement withdrawals are tax-free. As long as your MAGI is below the annual limit and you have taxable compensation equal to or greater than your contribution, you can contribute to a Roth IRA. Unless you're an extremely disciplined saver, you'll end up with more money after taxes in a Roth IRA.
Roth IRA conversions require a five-year withholding period before earnings can be withdrawn tax-free and subsequent conversions will require their own five-year withholding period. When a participant transfers a Roth 401 (k) balance to a new Roth IRA, the five-year qualification period starts over. Both traditional and Roth IRAs are great long-term savings tools, so learn about the differences and make an informed decision that fits your retirement goals. If your tax rate is lower now than when you start making withdrawals, you can maximize your tax benefits by making a contribution to the Roth IRA this tax year and receiving tax-free withdrawals in the future, assuming you have met the eligibility requirements.
Taking money out of your Roth IRA means you may lose the ability to capitalize on retirement earnings. A Roth IRA can offer flexibility in managing your taxes and expenses in retirement because you can withdraw money without increasing your tax bill, which could be useful if, for example, you have a large one-time expense after you retire. Roth IRAs do not have mandatory minimum distributions (RMD), meaning you are not required to withdraw money at any age or throughout your life. Distributions from a Roth 401 (k) are subject to the same general tax rules as a Roth IRA, with the exception of an RMD requirement.
Roth IRAs allow you to withdraw contributions at any time for any reason without taxes or penalties, but just because you can do it doesn't mean you have to, especially if you're quite young. .