What's the Difference Between a Traditional IRA vs. Roth IRA?

Retirement planning can be confusing, and your employees may have questions about the various options available to them. You may offer a 401(k) plan, where Gen X has been increasing their investments. However, your team may also want to explore Individual Retirement Accounts (IRAs) as an additional means of saving. The two most common types of IRAs are traditional and Roth.

Both types of IRAs have their own tax rules, contribution limits, eligibility requirements, and withdrawal guidelines. Understanding these differences can help you guide employees toward resources that align with their goals. Let's break down the basics of traditional IRA vs. Roth IRA so you can answer common employee questions and guide them in the right direction.

What's the Difference Between 401(k)s and IRAs?

IRAs are owned and managed by individuals. With an IRA, employees contribute directly through bank transfers or automatic deposits, rather than you deducting contributions from payroll.

A 401(k) is an employer-sponsored retirement plan. You integrate it with an employee’s paycheck and deduct their contributions. Unlike most IRAs, 401(k)s often include employer contributions or matching programs. Comparing a Roth 401(k) vs. a Roth IRA helps you determine which plan, or combination of plans, best supports your team’s long-term financial goals.

What's a Traditional IRA?

A traditional IRA is a retirement account where contributions may be deductible on a federal income tax return, potentially lowering taxable income for the year. Contributions come from your employees' earned income. Deducting them on the tax return provides an immediate tax benefit.

The investments in the account grow tax-deferred, so you won’t owe taxes on any earnings until you withdraw the funds during retirement. Many employees or small business owners may choose a traditional IRA to reduce taxes, especially if they expect to be in a similar or lower tax bracket in retirement.

What's a Roth IRA?

A Roth IRA is a retirement account funded with earned income that you cannot deduct on a federal income tax return. The primary advantage is that qualified withdrawals are tax-free once the account has been open for at least five years and the account holder is age 59½ or older. You or your employees might consider a Roth IRA if you anticipate being in a higher tax bracket during retirement or prefer greater flexibility with withdrawals.

Let’s say you receive a paycheck of $10,000 and contribute $3,000 to a traditional IRA and $3,000 to a Roth IRA. The $3,000 contributed to the traditional IRA may be deductible on your tax return, reducing your taxable income for the year. The Roth IRA contribution isn’t deductible, but qualified withdrawals in retirement are tax-free.

Main Differences Between Traditional IRA and Roth IRA

Understanding the difference between a traditional and Roth IRA can empower you and your employees to make smarter financial decisions. Here’s a side-by-side comparison:

How to Choose Between a Traditional IRA vs. Roth IRA

Helping employees understand their retirement options starts with sharing practical information and what to consider for long-term financial planning. Employees should seek tax advice from a professional; however, general guidance can empower them to make informed decisions. Here are some factors to consider when comparing Roth vs. traditional IRA:

• Current vs. Future Tax Bracket: A traditional IRA may be beneficial if withdrawals are in a lower tax bracket during retirement. A Roth IRA allows taxes to be paid upfront, with tax-free withdrawals later

• Access to Funds: Roth IRA contributions (not earnings) can be withdrawn at any time without taxes or penalties, offering flexibility for short-term needs

• Long-Term Growth: Roth IRA contributions grow tax-free, potentially increasing retirement savings through decades of compounding

How Justworks Can Help With Retirement Benefits

You don’t need to be a financial expert to make a lasting difference in your employees’ financial well-being. By understanding the basics of a traditional IRA vs. Roth IRA, you can offer clear guidance when employees have questions and help connect them with trusted resources.

Justworks can help you offer competitive 401(k) retirement plans to your employees and manage those benefits. The platform streamlines payroll, making it easy to provide high-quality employee benefits, track contributions, stay compliant, and simplify reporting. Get started with Justworks today.