The tax advantage of a traditional IRA is that your contributions are usually tax-deductible in the year they are made. When you pay taxes you’ll get an immediate break for investing in retirement, but you’ll still have to pay taxes when you accept distributions later in retirement.
For a Roth IRA, the tax advantage is that your withdrawals in retirement are not taxed. You pay taxes now on the income you invest in your Roth IRA. Roth IRAs do have Adjusted Gross Income limits to be mindful of.
The big question is: do you expect to be in a higher tax bracket when you’re retired versus where you are now? If you think you’ll be in a higher tax bracket in retirement, then paying lower taxes now in a Roth IRA makes more sense.
On the other hand, if you’re a high-earner and you expect to be in a lower tax bracket later, then a traditional IRA would allow you to defer the higher taxes you’d pay now until retirement when you’ll be in a lower bracket. And if you’re not sure, there’s no harm in having both which is often referred to as diversifying your tax exposure.
What Digit recommends
When you create a Digit Retirement account we ask you what your annual income is so we can make a recommendation for which IRA type works for you. Typically, Digit recommends a Roth IRA if your annual income is less than $124,000, and a traditional IRA if your annual income is greater or equal to $124,000.
You can always choose a different IRA type than the one we recommend during the account creation process, so please read carefully to confirm you're choosing the IRA account you want.
All Digit Retirement accounts are held and administered by our brokerage partner DriveWealth. DriveWealth is a broker-dealer, similar to Fidelity or E*Trade, which is a type of financial institution responsible for securely holding your assets and executing investment trades in your account.