Comparing Your Options: Roth IRA, Traditional IRA, or 401k?

Confused businessman concept as a man standing on a road making a decision on a path to take with a group of arrows going in many directions.

By Bryan Cambra

How do you know which type of retirement account is right for you?

There are three main options available for most individuals. The Roth IRA, Traditional IRA, and 401k retirement accounts are the most common because they are easy to establish and provide tax advantages. Take a look at each one to determine which could be right for your needs.

Traditional IRA Accounts

Traditional Individual Retirement Accounts (IRA)s provide a simple way of building funds over the long term. These accounts are easiest to establish at local banks or investment companies. Take into consideration these details:

Taxation: Funds put into a traditional IRA are taxed as ordinary income. The money is put into your IRA account pre-taxation. It grows there long term. When it is time to take it out of your retirement account (after you’ve reached the qualifying age of 59 1/2 years of age) you pay taxes on the distribution based on your current tax rate. For many, this is beneficial because they will have a much lower tax rate when they are in their 70s than when they are in their 40s due to reduced income.

Key factors:

  • You can contribute $5500 a year or $6500 a year if you are over 50 years of age. (This amount changes from year-to-year; these amounts are accurate for tax year 2015.)
  • You can take money out of your account prior to age 59, but only for qualified reasons such as college expenses or emergency needs due to disability.
  • You may qualify for a tax deduction for the amounts you deposit into these accounts each year.

Who is right for a traditional IRA? If you are likely to be making less money during retirement than you are now and you want tax deduction benefits, this may be a good retirement account for your needs.

Roth IRA

Roth IRA’s are similar in structure to traditional, but have different terms. Here are some important details to know about this type of retirement account:

Taxation: Contributions are taxed before they are placed into your account. In other words, these are after tax dollars (from your income) placed into the Roth IRA. When you begin taking funds out of your account, you will not pay taxes on the funds at that time. You can begin taking withdrawals at any time, without penalty. And, you can withdraw your earnings after the first five years.

Key factors:

  • There is no tax deduction for the amount you contribute. The same limits apply as with traditional IRAs.
  • You don’t have to take distributions when you reach 70 1/2, which is something you have to do with a traditional IRA.
  • You can continue to contribute to your account after 70 1/2 as well.
  • There is an income limit for this type of account. For singles, you can contribute if your income is in the range of $105,000 to $120,000. For married couples, your income needs to be between $166,00 to $176,000.

This type of account is best for those who are likely to have larger earnings later and who want the flexibility of borrowing from accounts during their planning.


Employers establish 401k accounts for employees. Unlike other retirement accounts, it is less common for individuals to establish these accounts. Contributions to these accounts are taken out of your paycheck and put into an investment account. Most often, employers pay the fee for managing these investment accounts. And, in many cases, employers contribute some or all of the funds you make into the account.

Taxation: The funds are placed into your account prior to being taxed by your employer. The funds grow like this until you begin taking them out, which must happen by the age of 70 1/2, unless you are still working with the same company. With this plan, you can retire as soon as age 55 to use these funds.

Key factors:

  • The funds are federally protected and cannot be seized by creditors.
  • You can save up to $18,000 per year for this type of account, with an additional $6000 per year if you are over the age of 50. (Again, these change annually; this figure is for 2015.)
  • Your employer selects and designs the 401k plan and may or may not contribute to it. You may have to wait until you are vested to use earnings.

401ks are beneficial for their higher contribution levels, employer matching, and lower fees but are generally required to be established by an employer.

Work with your financial advisor to determine which of these accounts is right for your unique needs.