The right path to take to save for retirement isn't always clear, especially when you're trying to decide between a traditional IRA and a Roth IRA.

Both are great tools for building your future and neither is objectively better than the other. The right one for you really comes down to your own situation, your goals, and how you'd rather handle taxes.

At Valley Credit Union, we talk with members about this all the time. We're not here to push you toward one option. We're here to help you understand your choices so you can pick what actually fits your life. 

Let's break it down together!

Key Takeaways

• With a traditional IRA you pay taxes on the money you contributed when you withdraw it in retirement. 
• A Roth IRA is funded with money you've already paid taxes on, so your qualified withdrawals in retirement are tax-free.
• If you deposit money into a traditional IRA yourself, outside of a payroll deferral, you could end up paying taxes on those funds twice. This is one of the most common mix-ups we see.
• Traditional IRAs come with Required Minimum Distributions (RMDs) starting at 73. Roth IRAs do not have RMDs.
• A tax advisor can help you figure out which option lines up best with your income and your future plans.
• When you open an IRA with Valley, we sit down with you, walk you through the paperwork, and help you plan ahead, including setting up your RMDs when the time comes.

What's the Real Difference Between a traditional IRA and a Roth IRA?

The biggest difference between a traditional IRA vs. a Roth IRA comes down to when you pay taxes on the money you've contributed to the account. 

Traditional IRA: When you contribute money to a traditional IRA you don't pay tax on it. That means you get a tax break today, but you'll owe taxes on that money when you take it out in retirement.

Roth IRA: Money goes in after it's already been taxed, no matter how it gets there. As a result, your qualified withdrawals in retirement are tax-free since you've already paid taxes on them. Roth IRAs also give you some nice flexibility as you can withdraw the money you've contributed (not the earnings) at any time, for any reason, without taxes or penalties. Just keep in mind that any earnings you withdraw before age 59½ may be taxed.

Both accounts help your money grow over time. The real question is just about timing: do you want the tax benefit now, or later?

Related: How to Save for Retirement with a Credit Union

The Mix-Up We See Most Often

Here's something a lot of our members don't realize, and it's easy to see why.

If your traditional IRA is funded through a payroll deferral (money transferred from a 401k type plan), that money hasn't been taxed yet, so it makes sense that you'll pay taxes when you withdraw it.

But if you deposit money into your traditional IRA yourself, outside of payroll, that money has usually already been taxed once when you earned it. If you're not careful, you could end up paying taxes on it again when you withdraw it in retirement.

With a Roth IRA, this mix-up doesn't happen, no matter how you fund it. Whether you contribute through payroll deduction or deposit the money yourself, it's after-tax money either way. So you're not stuck double-paying like you could be with a traditional IRA.

Generally, you'll only owe future taxes on any dividends or growth that hasn't already been taxed, not on the contributions themselves.

This is exactly why it helps to talk it through with a tax advisor before you decide how to fund your account.

A Story From One of Our Members

Not long ago, one of our staff members sat down with a member who wanted to add her own money into her traditional IRA. She hadn't realized that since the money hadn't come from a payroll deferral, she had already paid taxes on it once through her regular paycheck.

Our team let her know that yes, she could absolutely do that, but she'd want to think through the tax picture carefully first, since she could end up paying taxes on those dollars again when she eventually withdrew them.

We encouraged her to talk with a tax advisor to make sure she understood exactly how it would affect her.

Here at Valley Credit Union, we're here to help you make the best decision for your financial picture and goals. We'll help you ask the right questions and understand what's in front of you because your financial wellbeing is important to us.

Don't Forget About RMDs

Another important consideration when considering a traditional IRA vs a Roth IRA is required minimum distributions, or RMDs.

With a traditional IRA, once you reach 73, the IRS requires you to start withdrawing a minimum amount each year. The upside here is that by the time RMDs kick in, many people's income is lower than it was during their working years.

That can mean your taxable income, and what you owe in taxes, may be lower at that point too.

On the other hand, Roth IRAs don't have RMDs at all. Your money can stay put and keep growing for as long as you'd like, giving you more flexibility in how and when you use it.

Which One Should You Choose?

Honestly, there isn't a single right answer that works for everyone. It depends on things like your current income, what you expect your income to look like in retirement, and how you feel about paying taxes now versus later.

If you're not sure where to start, the best first step is to talk with a tax advisor. They can look at your full financial picture and help you understand which option makes the most sense for you.

And of course, our team at Valley Credit Union is always happy to sit down with you too.

We can walk you through how each account works and help you understand your options, even if the final tax decision is best made alongside your advisor.

Looking for other ways to save? Read our tips about unconventional ways to save for retirement.

What It's Like to Open an IRA With Valley

We know that opening a retirement account can feel intimidating, especially if you've heard that some bigger banks are stepping away from offering IRAs altogether. That's not the case here.

When you come in to open an IRA with us, we sit down with you one on one. We handle the application and the paperwork together, right here at your local branch.

And when the time comes for your RMDs, we'll help you set those up too, so you don't have to keep track of it all on your own.

That's the difference between banking with a community credit union and banking with a faceless institution. You're not a transaction to us. You're a neighbor, and we want to help you feel confident about your future.

If you're also thinking about saving for a child's education, we offer an Education IRA (also called a Coverdell Education Savings Account) that works alongside your retirement savings. Ask about it if that's part of your bigger financial picture.

Ready to Talk It Through?

Whichever way you decide to go, there's real value in opening your IRA somewhere that knows you by name. When you work with a local credit union, you're not routed through a call center or handed off between departments.

You sit down with someone in your community who takes the time to understand your situation and walks you through every step in person, right here where you live.

Down the road when it's time to set up your RMDs or make changes to your account, you're not starting over with a stranger. You're talking to a team that already knows your history and genuinely wants to see you do well.

Whether you're just starting to think about retirement savings or you're ready to open an account, our team at Valley Credit Union is here to help! Contact us today to learn more about opening an IRA with us. 

Frequently Asked Questions

What's the difference between a traditional IRA and a Roth IRA? 

It comes down to timing on taxes. With a traditional IRA, you get a tax break when you contribute but have to pay taxes on that money when you withdraw. With a Roth IRA, you contribute money that's already been taxed, so your qualified withdrawals later are generally tax-free.

Can I lose money by contributing to my traditional IRA on my own instead of through payroll? 

Not lose money exactly, but you could end up paying taxes twice on those contributions if you're not careful. That's why it's worth talking to a tax advisor before deciding how to fund your account.

Do Roth IRAs have Required Minimum Distributions? 

No. Roth IRAs don't have RMDs, so your money can keep growing for as long as you want.

Do traditional IRAs have Required Minimum Distributions? 

Yes. Once you reach 73, you're required to start withdrawing a minimum amount each year.

How do I know which IRA is right for me? 

It really depends on your personal situation. A tax advisor can help you look at your income now and in retirement to figure out which account makes the most sense.

What types of investment options are available for an IRA?

Your IRA can hold a mix of investments, from stocks and bonds to mutual funds and certificates of deposit. The right mix comes down to your retirement goals and how much risk feels comfortable for you.

What happens when I open an IRA at Valley Credit Union? 

Our team sits down with you in person, helps you complete the application, and can even help you plan ahead for your future RMDs.

Can I take money out of my Roth IRA whenever I want? 

You can withdraw the money you've contributed to a Roth IRA at any time, for any reason, without owing taxes or penalties. Just be careful with the earnings on your account. If you withdraw those before age 59½, they may be taxed.

 Justin Roberts, Vice President of Lending

Justin Roberts is our Vice President of Lending and has been in the financial industry for over 18 years. He is an Oregon State University Graduate and has just completed Western CUNA Management School. When he is not focused on helping the members at Valley, you will find him coaching his two sons and volunteering his time to help develop the youth in our communities through sports.