Finance
Planning for retirement? What to know about traditional, Roth IRAs
Ramsey Solutions financial expert George Kamel weighs in on Americans working past retirement age and provides advice for investors.
Socking away money for retirement is something that’s top of mind for many people.
Many Americans save money for their “Golden Years” through workplace retirement plans and individual accounts they set up, with traditional and Roth IRAs being frequently-used vehicles in the latter category.
Experts recommend you utilize a Roth or Traditional IRA in order to save and grow your retirement package. (iStock / iStock)
Roth IRAs
Holders of Roth IRAs are able to make after-tax contributions to their accounts.
“Why a lot of people like a Roth IRA today is that you pay income taxes today before you put the money into the Roth IRA,” Ted Jenkin, a personal finance expert and partner at Exit Wealth, told FOX Business. “The money grows tax-deferred while it’s inside of the Roth IRA, but the great news about a Roth IRA is you never, ever pay any tax when you take it out, so it’s basically taxed once today and then you’re never ever taxed again.”
For 2025, the contribution limit for Roth IRAs is $7,000 for ages below 50 and $8,000 for those older than that, according to the IRS.
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When a person takes out contributions from a Roth IRA, they will not have taxes or a penalty. A holder could face both if they do that for Roth IRA earnings before five years have elapsed since they’ve opened the account or they’re below the age of 59 ½, according to Fidelity.
Businessman in suit is holding piggy bank. Finance Savings concept (iStock / iStock)
Traditional IRAs
Funds put into traditional IRAs are typically “not taxed until you take a distribution,” according to the IRS.
“Just like a Roth IRA, the dollars grow tax-deferred. However, on all that growth in the traditional IRA, ultimately you’re going to be taxed when you take it out down the road,” Jenkin said.
He noted that “can be challenging because you don’t always know what your tax brackets are going to be down the road.”
People under 50 years old can make up to $7,000 in contributions to traditional IRAs in 2025. For those above 50, it is slightly higher, at $8,000.
In contrast to Roth IRAs, contributions to traditional IRAs can be tax-deductible but, according to Jenkin, that “depends on a number of factors.”
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He said the “big question” for deductibility was “Are you covered by a workplace retirement plan?”
“If you don’t, or your spouse does not, then you can fully deduct the traditional IRA,” he told FOX Business. “But if you have one at work, then there’s a phase out income-wise on how much income you have as to whether or not it’s deductible.”
When it comes to withdrawals for traditional IRAs, you can do so at any time but that distribution “will be includible in your taxable income and it may be subject to a 10% additional tax if you’re under age 59 ½,” according to the IRS.
For traditional IRAs, holders face a required minimum distribution they must pull out each year once they turn 73.
Things to think about
The differences between traditional and Roth IRAs give people planning for retirement plenty to think about as they mull which account they want to use.
Jenkin said one factor was “Do I want to be taxed now, or do I want to be taxed later?”
“When you’re younger, you’re generally in a lower tax bracket, which is why, for younger people, it’s a really great idea in my view to be putting money into a Roth IRA, because once it goes in there, you’re never taxed again.”
He also noted the Secure 2.0 Act that became law in late 2022.
“When you have a traditional IRA and you die and it goes to your kids or any other non-spouse inheritor, you have to take the money out of a traditional IRA within 10 years,” he said. “In a Roth IRA, when you die and your kids inherit the Roth IRA, they can take it out as long as they want. They’re not subject to that 10 years.”
When weighing opening a traditional or Roth IRA, Jenkin also said people should consider whether they can “leave the money in there for an extended period of time.” He said they should factor in their current tax brackets and their “overall future estate plan” for their family as well.
Documents about Individual retirement account IRA on a desk. (iStock / iStock)
He told FOX Business his “lean on this would be that more and more people should be looking at opening up a Roth IRA versus a traditional IRA.”
How many people have IRAs?
The Investment Company Institute said in a study released Thursday that nearly 44% of American households had IRAs in mid-2024, whether that be traditional, Roth, employer-sponsored or a combination.
Traditional IRAs were owned by 32.6% of households, it found. Over 26% of households had Roth IRAs.
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A separate report released by Fidelity Investments in February reported IRA accounts held average balances of $127,543 in the fourth quarter of 2024. That was an increase of 8% from the same three-month period in the prior year, according to the report.
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Americans have trillions of dollars of wealth locked up in their homes, and passing it on at death can get messy quickly.
The typical way of outlining who should get the house in a will can cause delays after death—so much so that most states have set up a new way for homeowners to document their wishes. It is called a transfer on death deed, and it has taken off in the past 15 years. New York and New Hampshire added the option last year.
These are blunt instruments, however, and they don’t account for all the complications of life. People make mistakes filling out the forms. Heirs get cut out inadvertently. The overall estate plan can conflict with the deed.
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Americans have trillions of dollars of wealth locked up in their homes, and passing it on at death can get messy quickly. (iStock)
And then it can go really wrong.
A Minnesota man named his niece as the beneficiary on one of these forms, but his ex-wife torched the home a few days after he died. That left his niece with just the land, and she lost a fight to get the insurance proceeds for the house. Courts ruled that he was the one insured but the form made the niece the sole owner, and the insurance didn’t cover her.
More people are having to decide whether to sell a home that has soared in value and pay a big capital-gains tax bill, or hold on to it to give to their children tax-free after they die.
Baby boomer homeowners hold $17 trillion in home equity. Three-quarters of them are planning to leave their current home or the proceeds from its sale to their children or other relatives, according to Freddie Mac.
Baby boomer homeowners hold $17 trillion in home equity. (iStock)
“There are so many pitfalls that you can step in,” said Frank Pugh, a lawyer in Leesburg, Va.
Traditionally, people with wealth write a will to outline what they want to happen with their property when they die. After death, a court then supervises the transfer of assets, a process known as probate that can be time-consuming and expensive.
To avoid probate, some people will set up a trust, and put their home and other assets in it, with detailed instructions for the trustee. But trusts, whereby the trustee distributes assets at death without court involvement, require attention to make sure assets are titled properly.
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Transfer on death deeds were created as a no-fuss option to avoid probate. It is akin to listing a beneficiary on a 401(k) or on a payable-on-death form for a brokerage account. When the homeowner dies, the beneficiary named on the deed gets the house right away.
“It’s the difference between off-the-rack and custom tailoring,” said Thomas Gallanis, a professor at George Mason University’s law school who was the principal drafter for a model law on TOD deeds in 2009.
Rules vary by state, but in most cases the deed needs to be notarized and recorded at the local courthouse where the property is located.
Rules vary by state, but in most cases the deed needs to be notarized and recorded at the local courthouse where the property is located. (iStock / iStock)
Homeowners can revoke a transfer on death deed at any time—which is unlike adding someone to a deed as a joint owner.
Lawyers use these deeds often, typically in conjunction with a trust, said Jen Gumbel, an estate planner in Rochester, Minn. She has seen deeds being invalidated because do-it-yourself owners fill them out themselves, failing either to describe the property accurately or to get a spouse to sign off. “These are really technical documents,” she said.
States are still making tweaks to the deed laws. Minnesota updated its law last year in response to the case in which the owner’s ex-wife torched the house. Beneficiaries are now covered by insurance for up to 30 days, as long as the owner gave a copy of the deed and beneficiary information to the insurer before dying.
Things can get more complicated when there is outstanding debt on the property. Skyler Woodard, a 32-year-old welder, has been in a fight for the roughly 200-acre family farm in Nodine, Minn., since 2018, when his father died of cancer.
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His parents bought the farm on a rent-to-own contract from his maternal grandparents in 1994. His father got it in a divorce settlement in 1999, and continued making the payments to the grandparents. His father named Woodard as beneficiary of the farm on a transfer on death deed, but the grandparents asserted it violated an anti-transfer provision in the contract and canceled the contract. The Minnesota Court of Appeals agreed with the grandparents, allowing them to take back the farm. The state Supreme Court declined to review the case.
“He was trying to give me the farm,” Woodard said. He is pursuing an unjust enrichment case against his grandmother now, because his father had made payments on the farm for 23 years. The lawyer for the grandmother had no comment.
A transfer on death deed might successfully pass along the house but still complicate how expenses, debts and taxes are paid, said Stacy Singer, national practice leader for trust and wealth advisory services at Northern Trust. Those are all things that can be spelled out in a will or trust but not in a deed.
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In one case that Singer handled, an 80-year-old man left his girlfriend his $700,000 house via a transfer on death deed. She got a surprise $25,000 tax bill to pay her share of the Illinois estate tax.
She probably could have avoided that tax bill if her boyfriend had just left her the house as a specific bequest in his will.
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