Should You Put Your Money in a Roth or Traditional Retirement Account in 2022?

Here's how to make the right call.

As a general rule, it's a good idea to sock away a substantial chunk of your paycheck for retirement savings. You'll need that money in the future to cover your bills once you stop working, because while Social Security will provide you with some income, it's generally not enough to live comfortably on.

Now when it comes to choosing a retirement plan, you have choices. If your company offers a 401(k), it could pay to sign up, especially if there's an employer match involved (where your company will give you free money for contributing funds from your own paycheck). But if you don't have access to a 401(k), you can open an IRA.

IRAs come in two varieties -- traditional and Roth. And each has its own benefits and drawbacks from a tax perspective. If you're not sure which retirement account is best for you this year, here's how to make that decision.

Traditional IRA pros and cons

With a traditional IRA, the money you contribute goes in on a pre-tax basis. If you're under 50, you can contribute up to $6,000 this year, or up to $7,000 if you're 50 or older. (Note this tax break may not apply to you depending on your income and whether you also participate in a 401(k) plan).

Once you fund a traditional IRA, your money gets to grow on a tax-deferred basis. This means that as you enjoy gains in your account, you don't pay taxes on them year after year. Rather, you only pay taxes when you take withdrawals from your account later on. That money is yours to enjoy penalty-free once you turn 59 1/2.

If you're worried about a big tax bill this year, then a traditional IRA could make sense. Say you're 40 and contribute the maximum amount for your age. That means the IRS won't get to tax $6,000 of your salary, which could amount to nice savings.

Roth IRA pros and cons

Roth IRAs have the same annual contribution limits as traditional ones. With a Roth IRA, there's no tax break on the money that goes into your account. You may also be barred from funding a Roth IRA directly if you're a higher earner, though you can generally get around that by contributing to a traditional IRA and then converting it to a Roth afterward.

The upside of putting money into a Roth IRA, though, is that any gains you enjoy in your account are tax free. Withdrawals are tax free as well, giving you more financial flexibility during retirement, when money might be tight.

What’s more, you're supposed to wait until age 59 1/2 to access your Roth IRA funds to avoid penalties on early withdrawals. But technically, you can withdraw some of your principal contributions before that age and avoid penalties because that money never got tax-favored treatment to begin with. It's only once you withdraw your gains early that penalties come into play with a Roth. In other words, if you contribute $6,000 to your Roth IRA this year and it grows into $6,500, you'll avoid penalties as long as you leave your $500 in gains alone until age 59 1/2.

Now, let's say you're starting off 2022 with no emergency savings. Putting your money into a Roth IRA could make sense, because even though the point of this account is to set funds aside for retirement, it also doesn't hurt to have the knowledge that you could, if needed, tap your IRA without penalty in a pinch.

What's the right call?

If you don't expect a huge tax bill this year and you think you'll be in a higher tax bracket later in life than you are right now (say, because you don't have a very high income), then a Roth IRA could make sense this year. But if you're worried about taxes, a traditional IRA may be a better bet.

The great thing about IRAs is that you don't have to make a lifetime commitment. You can start with one type of IRA this year and fund another one next year if your circumstances change. You can even split your retirement contributions between a traditional IRA and a Roth this year if that's the route you decide to take.