Sooner is always better when it comes to saving for retirement. Making contributions to a retirement savings account early in your career will allow your money to grow and compound over the years and provide excellent tax benefits, which will help in the long-term. An individual retirement account (IRA) is a common type of retirement savings account that you may want to consider, and the most popular types of IRAs are Traditional IRAs and Roth IRAs. These accounts have some similarities, but the primary difference is when and how you get a tax break. Here’s how to decide which might be right for you.

What is an IRA?

First, the basics: An IRA is a tax-advantaged investment account designed to help you save for retirement. While there are various IRAs, the most popular are Traditional and Roth IRAs.

Before deciding which type of IRA will work best for you, it’s helpful to understand the main features of these accounts:

  • Tax-Savings: IRAs allow you to experience tax benefits either in the current year or upon retirement.
  • Individual Accounts: As the name implies, IRAs are individual accounts. Unlike Health Savings Accounts (HSAs), where spouses can form a family plan, each spouse will need their own IRA to benefit fully.
  • Contribution Limits: There are restrictions on how much you can contribute to your IRA per calendar year. For example, in 2025, individuals may contribute up to a maximum of $7,000 in a Traditional or Roth IRA ($8,000 annually if you’re over the age of 50).
  • Delayed Withdrawals: You may begin withdrawing funds from your IRA once you reach the age of 59 ½ years.
  • Investment Options: You have the option to use a retirement brokerage account, which allows you to invest within the markets. Or you can choose an IRA at a financial institution, such as a credit union or a bank. The latter two provide more conservative options that benefit those just starting out or individuals who are nearing retirement.

What’s a Traditional IRA?

A traditional IRA allows you to save on taxes now. It’s similar to most employer-sponsored 401(k) plans. With a traditional IRA, the money you contribute is pre-tax, meaning you do not pay taxes on the funds in the current year. Typically, contributions are withdrawn automatically from your paycheck and are transferred directly to your IRA.

The tax perk of traditional IRAs is that the money deposited in the current year is generally tax deductible. You will pay fewer taxes for that calendar year by reducing your taxable income. And the money in your traditional IRA will grow tax-deferred, meaning you will not pay any taxes on the money you earn until you begin making withdrawals.

Once you begin making withdrawals in retirement, you will pay taxes on the money. The amount of taxes you pay will be dependent upon current tax rates and your qualifying tax bracket. And if you access money in a traditional IRA prior to age 59 ½, there will be penalties and you will be required to pay taxes on the withdrawn funds.

Who Are Ideal Candidates for a Traditional IRA?

A traditional IRA is likely to be a good fit for individuals looking for immediate tax savings. A traditional IRA instantly lowers your current-year tax bill through tax-deductible contributions.

It is also an ideal retirement savings account for workers who are in their peak earning years. If you are at the peak of your career earning potential, you are most likely in a higher tax bracket today than you will be once you retire. In this scenario, tax savings today will likely outweigh those in your retirement years.

What is a Roth IRA?

A Roth IRA provides tax benefits in retirement. The money you contribute to your Roth IRA is made after tax, meaning you pay taxes on the funds in the current year. The money in your traditional IRA will grow tax-free, meaning you will not pay taxes on any money you earn in a Roth IRA over the years.

With a Roth IRA, you will save on taxes later. Since you already paid taxes on the money in your Roth IRA when you made your contributions, you do not pay taxes on these funds again. Instead, you will enjoy tax-free withdrawals on all the funds in your Roth IRA once you retire. This perk is one of the reasons Roth IRAs are so popular and beneficial.

You are also able to make early withdrawals from your Roth IRA without penalties or being required to pay taxes. However, this only applies to your contributions – not money earned in the account. If you withdraw earnings, you could be subject to early withdrawal penalties and potential taxes.

Who Are Ideal Candidates for Roth IRAs?

A Roth IRA is likely to be a good fit for younger to mid-level workers who have yet to reach their peak earning years and for individuals who anticipate being in a higher tax bracket once retired.

A Roth IRA may also be a good fit for those who believe taxes will be higher in the future, or for future retirees who would like to leave tax-free money to their heirs.

Which IRA is Right for You?

IRAs are powerful retirement accounts that provide significant tax benefits. Deciding which is right for you doesn’t have to be a final decision.

For example, a Roth IRA may provide greater tax benefits when you’re younger. As you reach your peak-earning years in your career, you might also decide to open a Traditional IRA. However, you cannot contribute more than the annual limit between the two accounts.

Retirement planning is an ongoing process, and Credit Union 1 is here to help. Explore IRA options and rates or schedule an appointment with a CU1 team member to discuss which options may be right for you.