The financial world is full of decisions you need to make: How much should I contribute to my 401(k) at work? (Perhaps contribute as much as you can.) Should I invest in mutual funds or exchange-traded funds (ETFs)? (Either can be great — just aim to minimize the fees you pay.)

One decision many people face is whether to invest in a traditional IRA or a Roth IRA. So permit me to lay out some information about each — before discussing why I love the Roth IRA for me.

Image source: Getty Images.

Meet the traditional IRA

With a traditional IRA, you get an upfront tax break for the tax year in which you made your contribution. So if you plunk $5,000 in a traditional IRA this month, you can deduct $5,000 from your taxable income on your 2024 tax return. Presto — you’ll have lowered your tax bill!

You can actually make contributions for each tax year until the tax-filing deadline in the following year. So the deadline for 2024 is April 15, 2025. (Just be sure to make clear which year your contribution is for.)

All IRAs have a total contribution limit of $7,000, plus a $1,000 catch-up contribution for those 50 or older. So, for example, if you’re 52, you can send $3,000 to one IRA and $5,000 to another if you want. That limit is for both 2024 and 2025. The limit is often increased from year to year, but is holding steady for 2025.

Here are some things to know about traditional IRAs:

• They’re mainly funded with pre-tax dollars and that money grows on a tax-deferred basis.
• They feature required minimum distributions (RMDs) that begin at age 73.
• Withdrawals can be made without penalty after you’ve had the account for five years and once you reach age 59 1/2.
• When you withdraw money from a traditional IRA, it’s taxed as ordinary income.
• There are some income limitations that restrict how much high earners can contribute on a tax-deductible basis.
• If you expect your tax rate to be lower in the future, money you contribute to a traditional IRA will be taxed later, potentially at that lower rate.

Meet the Roth IRA

While the traditional IRA offers an upfront tax break, the Roth IRA offers a back-end one. If you follow the rules, you can withdraw money from the account tax-free in the future. That can be a big deal if your account grows to a hefty size by retirement. And IRAs can grow to hefty sizes — Warren Buffett’s investing lieutenant Ted Weschler grew his to $264 million!

Here are some things to know about Roth IRAs:

• They’re funded with after-tax dollars and that money grows tax-free.
• There are income limitations for contributing to Roth IRAs, disqualifying high earners.
• You can convert money from a traditional IRA to a Roth via a “backdoor” conversion. This can help high earners fund Roth IRAs.
• Withdrawals can be made without penalty after you’ve had the account for five years and once you reach age 59 1/2.
• There’s no penalty if you withdraw your contributions (but not their earnings) early — though it’s often a financially harmful thing to do.
• You don’t ever have to withdraw your money. You can leave it to a charity or a loved one if you don’t need to tap it in retirement.

Why I prefer the Roth IRA

While 401(k) accounts usually offer you a rather limited set of funds in which you can invest your money, an IRA account (either traditional or Roth) opened at a good brokerage will permit you to invest that money in just about any stock or ETF and gobs of mutual funds, too. (Note that these days, many 401(k) plans offer both traditional and Roth accounts.)

That greater investing flexibility is a big reason why I love IRAs, and I favor Roth IRAs because if I invest my money well and it grows at a good clip, all that money will be mine to use in retirement without any taxes due.

The table below shows how much you might amass in a Roth IRA if you contribute $7,000 annually. Of course, the contribution limits are likely to increase over time, and so may your contributions.

Data source: Calculations by author.

Either can be great

But what’s right for me isn’t necessarily right for you. It’s worth thinking through the pros and cons and features of both kinds of IRAs to see which will serve you best. Know, too, that you can always invest in both! There’s nothing stopping you from contributing to both kinds of accounts over the years.

The most important thing to do is have a solid retirement plan and to keep saving and investing for many years.

The $22,924 Social Security bonus most retirees completely overlook

If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $22,924 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after. Simply click here to discover how to learn more about these strategies.

View the “Social Security secrets” »

The Motley Fool has a disclosure policy.