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Efficiently Saving for Retirement: Traditional IRA and Roth IRA

Categories: Insights | Retirement planning |
Estimated Reading Time:
4 minutes

“Work smarter, not harder,” is a nearly century-old saying that defines efficiency.

What might happen if we apply that saying to saving for retirement?

How can you more efficiently save for retirement? Traditional IRAs and Roth IRAs are common investment vehicles used for retirement savings. Leveraging these accounts to your full financial advantage is one solution.

Traditional IRA

A Traditional Individual Retirement Account (IRA) is an investment account that allows individuals to make tax-deductible, pre-tax contributions. These contributions also grow tax-deferred. This means your contributions will be deducted from your current gross income and it is not until you withdraw the money that it will be taxed at ordinary income tax rates.

Because pre-tax deductibility and tax-deferred growth are very advantageous, every year the Internal Revenue Service (IRS) sets limits on:

  • Who may deduct contributions, and
  • How much may be contributed to a traditional IRA.

For 2021, the contribution limit is $6,000 for those under age 50, and $7,000 for those age 50 or older. (Note: This is an annual limit on the total sum of contributions made to both traditional and Roth IRAs).

To make IRA contributions, you must have earned income in the tax year you are making the contribution.* Although anyone may contribute to an IRA, there are limits on who may deduct the contributions, which is one of the main advantages of a Traditional IRA. If neither you nor your spouse are an active participant in a qualified retirement plan (often a 401(k) via an employer), traditional IRA contributions are always deductible. However, if you or your spouse are an active participant in a qualified retirement plan, full or partial contribution deductibility is dependent on if you fall below or in the specified Modified Adjusted Gross Income (MAGI) phaseout ranges determined by the IRS:

2021 MAGI Phaseout Ranges for Active Participant IRA Contribution Deductions

Filing Status MAGI Phaseout Ranges
Single $66,000 – $76,000
Married Filing Jointly $105,000 – $125,000
Married Filing Separately $0 – $10,000
Non-Active Participant Married to Active Participant $198,000 – $208,000


Roth IRA

A Roth IRA is a type of individual retirement account that offers tax-free growth and withdrawals.  The caveat, however, is contributions are non-deductible and must be made with after-tax dollars. This means with a Roth IRA you are paying taxes now to avoid paying taxes in the future.

The IRS imposes two limits on annual Roth IRA contributions. The first is a contribution limit, which is the same as that for a traditional IRA. Secondly, like a traditional IRA, there is a limit on who may contribute to a Roth IRA based on the following MAGI phaseout ranges:

2021 MAGI Phaseout Ranges for Roth IRA Contributions

Filing Status MAGI Phaseout Ranges
Single $125,000 – $140,000
Married Filing Jointly $198,000 – $208,000

Traditional IRA vs. Roth IRA Comparison

ira chart

Efficiently Saving for Retirement

When analyzing the tax-efficiency of different retirement contributions and accounts, ask yourself these three questions:

  • How does my current tax rate differ from my projected tax rate in retirement?
  • How does making pre-tax versus after-tax contributions affect my current net cash flow and budget?
  • What is my investment time horizon – i.e. when will I be starting to withdraw the funds and how many years will my investments have to potentially grow?
  • The answers to those questions will provide more clarity on how you can more efficiently and strategically save for retirement.

Below are some tips:

  • Roth IRA contributions and qualified retirement plan contributions such as those to a traditional 401(k) are not mutually exclusive. If you can maximize both, consider doing so. Learn more about Roth 401(k) plans here.
  • If you are in a high marginal tax bracket and are close to retirement, it typically will be more advantageous for you to make tax-deferred contributions to retirement accounts. This is because your tax rate in retirement will most likely drop significantly once you stop working, making paying income taxes in retirement more efficient than paying them now. If you are unable to contribute to a Traditional IRA due to IRS limitations, make sure you take full advantage of contributing to your qualified retirement plan.
  • Generally, if you are in a high marginal tax bracket, your MAGI may also prohibit you from making Roth IRA contributions. Although this is true, there is a way to make additions to a Roth IRA even once you exceed the phaseout ranges. This is called a backdoor Roth IRA conversion. If this interests you, I encourage you to talk with a Domani Wealth financial advisor on how you could leverage this retirement savings strategy.
  • It typically is advantageous for individuals earlier in their career to make Roth IRA contributions if their budget allows. Individuals at the start of their career are usually in lower income tax brackets, making it more efficient to pay taxes now versus waiting until retirement where withdrawals potentially could be taxed at higher rates. Also, for many career paths, your income could grow to the point where you are either phased out of the Roth IRA or it makes more sense to save pre-tax. Most importantly, early investments have more time to grow tax-free to make up for any non-deductible contributions.
  • If you are eligible to contribute to both a Roth IRA and Traditional IRA and have significant time until you plan on needing the funds, barring major tax law changes in the future, making Roth IRA contributions is usually the more tax-efficient option. Your investments will have decades to grow tax-free to make up for any non-deductible contributions.

Helping clients save for retirement and plan for their future is one of our main focuses at Domani Wealth. Understanding the advantages and disadvantages of common retirement accounts like a Traditional or Roth IRA is one way you can begin to make more efficient retirement savings decisions. To learn more about tax-efficient and effective retirement savings approaches, you can read other Domani Wealth blog posts, including Keep More Dollars in Your Pocket: Tax Planning and Retirement Savings Strategy. If you would like to feel more confident in your retirement savings plan today, we’re always available to start a conversation. Call us at 855-855-5455 or email us at info@domaniwealth.com.

* If a married couple files a joint tax return and one spouse has no earned income, there is an option to open and contribute to a spousal IRA for the spouse with no earned income.

Important Disclosure

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from Domani. A copy of Domani’s current written disclosure brochure discussing our advisory services and fees continues to remain available upon request.


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