Traditional IRA or Roth IRA: Which is better for a 30-year-old?

We often help clients of our Cape Cod accounting firm decide which makes the most sense for them, an IRA or a Roth IRA. When considering whether an IRA (Traditional IRA) or a Roth IRA makes the most sense for a 30-year-old single person in the United States, there are a few key factors to weigh. Both of these individual retirement accounts come with distinct advantages depending on your current financial situation, income level, and long-term goals.

Let's break down both options:

1. Roth IRA: The Best Choice for Most 30-Year-Olds

Overview: A Roth IRA allows you to contribute after-tax dollars, meaning the money you contribute is already taxed. The big advantage is that once you reach retirement age, you can withdraw the funds tax-free (both the original contributions and the investment earnings), assuming certain conditions are met.

Why a Roth IRA makes sense for a 30-year-old:

• Tax-Free Growth: Since you’re likely at a lower tax rate now than you’ll be in the future, paying taxes upfront on your contributions is generally a smart choice. In retirement, when you may be in a higher tax bracket, the ability to withdraw funds tax-free is a significant advantage.
• Long Time Horizon: You have several decades of potential growth before retirement. The power of compound interest is best realized over long periods, and with a Roth IRA, your investment earnings grow tax-free and remain that way for decades.
• No RMDs (Required Minimum Distributions): Roth IRAs do not require you to take mandatory distributions at age 73, unlike Traditional IRAs. This can help if you want your investments to continue growing without the pressure of withdrawing them.
• Access to Contributions: You can withdraw the contributions (but not earnings) from your Roth IRA at any time, tax- and penalty-free. This flexibility makes it a useful option in case of an emergency or unexpected need for funds.
• Income Limits: For 2025, if you're a single filer, you can contribute to a Roth IRA if your modified adjusted gross income (MAGI) is under $153,000. While this could change as your income rises, at 30, you might still be under that threshold.

2. Traditional IRA: A Good Option Depending on Your Current Situation

Overview: With a Traditional IRA, you contribute pre-tax dollars, meaning the amount you contribute can potentially reduce your taxable income for the year. The trade-off is that you’ll pay taxes when you withdraw the funds in retirement (i.e., both contributions and earnings are taxed as ordinary income).

Why a Traditional IRA might make sense for a 30-year-old:

• Immediate Tax Deduction: If you're in a higher tax bracket now and need to reduce your taxable income, a Traditional IRA can provide a tax break in the short term. This might be more beneficial if you're currently in a high-paying job and expect to be in a lower tax bracket during retirement.
• Lower Tax Rates in Retirement: If you anticipate being in a lower tax bracket in retirement than you are now, you could benefit from deferring taxes until retirement when your income will be less. This can result in a lower overall tax burden.
• Income Limits: If you’re eligible for a deductible Traditional IRA (based on your income and whether you have access to a retirement plan at work), contributing to a Traditional IRA can reduce your taxable income. For 2025, you can deduct the full contribution if you're a single filer earning under $73,000 (phase-out starts at $63,000). However, if you’re above those thresholds and you participate in a workplace retirement plan, your ability to deduct your contributions may be limited.
• Required Minimum Distributions (RMDs): Unlike a Roth IRA, a Traditional IRA requires you to begin taking minimum distributions at age 73. While this isn’t ideal for everyone, if you want to ensure that you don’t outlive your savings, the mandatory distributions can be a helpful tool to spread out your retirement withdrawals.

3. Considerations for a 30-Year-Old:

• Income Growth: If you’re still in the early years of your career and expect your income to increase significantly, contributing to a Roth IRA might be more beneficial because you’re locking in a lower tax rate on your contributions while your income is lower.
• Tax Flexibility in Retirement: Having a Roth IRA can offer significant flexibility in retirement. You can withdraw tax-free, giving you more control over your taxable income in retirement. This could be useful if you want to minimize taxes when you’re no longer working.
• Long-Term Growth Potential: At 30, you have decades to benefit from tax-free growth, making the Roth IRA’s tax-free earnings a strong selling point. The earlier you start, the more significant your potential growth will be.

4. Which One is Right for You?

• If you expect to be in a higher tax bracket when you retire, a Roth IRA is likely the better choice. By paying taxes now while your income is lower, you’ll avoid paying taxes at a higher rate when you retire.
• If you need an immediate tax break and you expect to be in a lower tax bracket in retirement, a Traditional IRA might be a better fit. This could be the case if you're just starting your career and your income is rising, but you anticipate a more modest income in retirement.

5. Contribution Limits:

Both the Roth IRA and Traditional IRA have the same contribution limits for 2025:

• You can contribute up to $6,500 if you’re under 50.
• If you’re 50 or older, you can contribute up to $7,500 due to catch-up contributions.

6. Key Takeaways:

• Roth IRA is often the better choice for younger people who are likely to be in a higher tax bracket in retirement or who want tax-free growth and flexibility in withdrawals.
• Traditional IRA may make more sense if you’re in a higher tax bracket now and expect to be in a lower tax bracket in retirement.

For most 30-year-olds, a Roth IRA is typically the better option due to its tax-free growth, long-term benefits, and the ability to withdraw contributions at any time without penalty.

Final Advice:

Ultimately, the decision comes down to your personal financial situation, your current income, your expectations for the future, and your retirement goals. If you’re unsure, consulting with a financial advisor can help you make the best decision based on your specific needs and financial plans.

Please contact The Varney Group, an accounting firm based on Cape Cod, to arrange a consultation.