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TRADITIONAL VS. ROTH IRAS: WHICH IS BETTER?

 * November 24, 2021

Want to open an IRA but aren’t sure which is better, a traditional vs. Roth IRA?
We look at the differences between them, along with their role in diversifying
your portfolio.

If you’re opening an individual retirement account (IRA) for the first time, you
may be wondering which is better, a traditional vs. a Roth IRA?

The truth is each has its own benefits, and what’s right for you may not be
right for someone else. There are also no rules about how many IRAs you can
have, and some people have both for different reasons.

To help you choose, we’re looking at the differences of a Roth IRA vs. a
traditional IRA.


ROTH AND TRADITIONAL IRAS BOTH OFFER UNIQUE (TAX) ADVANTAGES

Open to anyone earning an income, an individual retirement account (IRA) is a
tax-savvy way to invest for your future, with the two most common being
traditional and Roth IRAs.

Both provide special tax advantages to account holders provided you wait until
at least six months after turning 59 to make a withdrawal. (As you’ll find out
later in this post, there are additional rules for Roth IRAs.)

Typically, IRAs are managed by a custodian and offer limited investment options
in the same way that many employer-provided 401(k) accounts offer just a handful
of options limited based on your tolerance for risk and anticipated distribution
date. However, what many people don’t know is that you can also use an IRA to
invest in non-traditional assets. 

With a traditional or Roth self-directed IRA, you can invest in a variety of
private offerings and other alternative asset classes, including:

 * Commercial and residential real estate
 * Cryptocurrencies
 * Farmland and other land rights
 * Music royalties and publishing rights
 * Securitized artworks and other collectibles
 * Shares of investment-grade wines and spirits
 * Startups and pre-IPO companies

Because many of these assets are not strongly correlated with the stock market,
a self-directed IRA is a terrific way to diversify your portfolio beyond the
increasingly outdated 60/40 model of just stocks and bonds. And because you
can’t withdraw from an IRA penalty-free at just any time, they make a good fit
for alternative investments, which tend to take longer to mature.

Before jumping into a comparison of Roth vs. traditional IRAs, it’s helpful to
understand IRA contribution limits.


TRADITIONAL AND ROTH IRA CONTRIBUTION LIMITS

As with other tax-advantaged retirement investments, IRAs are subject to
contribution limits. Currently, traditional and Roth IRA account holders can
contribute up to $6,000 per year, with an extra $1,000 “catch up” contribution
allowed for people 50 and older.

Unlike with traditional IRAs, there are income-based restrictions for who can
contribute to a Roth IRA. Per the 2022 Internal Revenue Service (IRS)
guidelines, the following are ineligible to contribute to a Roth IRA:

 * Individual filers with an annual income of $144,000 or more
 * Joint filers with an annual income of at least $214,000

Additionally, people in certain income ranges are eligible to make reduced
contributions:

 * Individual filers earning between $129,000 and $143,999.99 annually
 * Joint filers earning between $204,000 and $213,999.99 annually

There are, however, ways to fund a new Roth IRA account even if your income
exceeds the IRS limits.


OTHER WAYS TO FUND YOUR IRA

IRAs can also be funded by rolling over another IRA or other retirement account,
such as a 401(k) or 403(b) from a previous employer. Rollovers do not count
toward the annual contribution limit. 

When rolling funds between like accounts, you won’t pay a tax penalty as long as
you follow the rules for doing so. Examples include rolling a traditional 401(k)
into a traditional IRA or funds from one Roth IRA to a new Roth IRA. 

However, it’s also possible to roll a traditional, tax-deferred retirement
account into a tax-free Roth IRA by paying taxes on the transfer. (To learn more
about this popular investment strategy, read our blog post on backdoor Roth
IRAs.)

Now that we have a better idea of what IRAs can be invested in, how IRA
contribution limits work, and other methods of funding an IRA, we can jump into
the advantages each offers.


THE BENEFITS OF A TRADITIONAL IRA

IRAs were created by Congress in the 1970s to incentivize investing for
retirement through tax-deferred contributions. At the time, fewer and fewer
companies were offering pensions and the alarm was already being sounded that
Social Security would run out—a concern that appears increasingly likely.

The idea was that by allowing individuals to make pre-tax contributions, they
could afford to invest more upfront, giving their investments more time to grow.
Instead, investors would pay income taxes upon taking distributions—when they
might find themselves in a lower tax bracket (say, if no longer earning a
salary).

Likewise, IRA holders were encouraged to give their investments time to generate
returns by imposing penalties on withdrawals made prior to six months after
turning 59. Keep in mind that traditional IRA account holders are not required
to take distributions until turning 72.

To recap the advantages of a traditional IRA, these tax-deferred investment
accounts can be a good choice for investors who:

 * Have limited income to invest but want to put aside as much as they can now
 * Anticipate being in a lower tax bracket when distributions are taken
 * Want to show less taxable income for the current tax year
 * Aren’t eligible to contribute to a Roth IRA


THE BENEFITS OF A ROTH IRA

By the 1990s, a lot of people still weren’t using IRAs to invest for the future.
So Congress created the Roth IRA, which offers a potentially greater perk:
completely tax-free gains and distributions for those who are eligible. 

In fact, it was to prevent the ultra-wealthy from using Roth IRAs to shield
their income from taxes that Congress imposed limits on who could contribute to
a Roth IRA. 

Roth IRAs have the same contribution limits as traditional IRAs, but
contributions are made using after-tax money. As a result, withdrawals are
completely tax-free as long as your account is at least five years old and you
wait until six months after turning 59 to take your first distribution. Also,
Roth IRA holders are not required to take RMDs.

Though contributions are not available to everyone, there are many benefits to a
Roth IRA, making them great for people who:

 * Expect their investments to grow considerably
 * Never want to pay taxes on their investments
 * Believe income taxes will be higher when eligible to take distributions
 * Anticipate being in a higher tax bracket when they go to take distributions
 * Don’t want to begin taking distributions at age 72


USE YOUR TRADITIONAL OR ROTH IRA TO INVEST IN CRYPTO AND OTHER ALTS

Whether a Roth or traditional IRA is right for you, both offer considerable
advantages over taxable investment accounts. For this reason, many investors
have both traditional and Roth IRA accounts.

If you’re interested in using tax-advantaged retirement funds to invest in
non-traditional assets, a self-directed IRA from Alto may be what you’re looking
for. 

Alto offers two different IRAs, both of which are available as traditional,
Roth, or Simplified Employee Pension (SEP) IRAs:

 * Alto IRA makes it easy for accredited and non-accredited investors alike to
   invest in alternative assets through more than 60 partnerships. Examples
   include AngelList, Masterworks, Grayscale, Fundr, Vint, and more. You can
   even bring your own investment deal to the table.
 * Alto CryptoIRA® lets you buy, sell, and trade more than 100 different crypto
   assets with low $10 investment minimums, no monthly account fees, and
   integration with Coinbase—one of the largest cryptocurrency exchanges in the
   world.

Ready to start investing with a traditional or Roth self-directed IRA, open an
Alto account today!

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Nov 18


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YOUR RETIREMENT IS NOW IN YOUR CONTROL.

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MADE IN NASHVILLE, TN

© 2021 Alto Solutions, Inc. All rights reserved.

Privacy Policy  |  Terms of Service   |  Legal Terms

1Capital gains accrue on a tax deferred or tax-free basis dependent upon your
IRA account type. Alto does not provide tax advice. Consult a tax advisor or
certified financial professional with any questions.

1Traditional IRA and SEP taxes are deferred; Roth IRAs are tax-free.

Alto Solutions, Inc. d/b/a AltoIRA (Alto) is an administrator of self-directed
individual retirement accounts and is not a registered or licensed broker,
dealer, broker-dealer, funding portal, cryptocurrency exchange, investment
advisor or investment manager. Read more… Alto does not provide investment
advice or recommendations about any specific security offering, investment or
asset. Investing in start-ups, cryptocurrency, securitized art and other
alternative investments involves significant risks. Alto services are intended
only for investors who fully understand and are willing to accept the risks
associated with alternative investments and the management of self-directed
IRAs. Alto does not control or monitor the operation or conduct of third party
investment platforms, funds, cryptocurrency exchanges or issuers, or their
offerings. Information provided by AltoIRA does not constitute an offer, nor the
solicitation of an offer to buy or subscribe to, any securities to any person in
any jurisdiction.  Whenever making an investment decision, investors should
consult with their tax attorney or financial professional. Investors are
responsible for conducting their own due diligence regarding investments, for
using their Alto accounts in compliance with law, and for all tax and other
risks and obligations arising from account transactions. Alto®, The Alternative
IRA®, the Alto logo and Alto CryptoIRA® are trademarks of AltoIRA.  All other
trademarks are the properties of their respective owners. See additional
information on file here.