Roth IRA vs. traditional IRA

Key points

• Traditional and Roth IRAs are tax-advantaged accounts you can use to save for retirement.
• With a Roth IRA, you get a tax benefit on your retirement distributions.
• A traditional IRA makes sense if you think your tax rate will be lower during retirement. 

When you’re saving for retirement, there are plenty of accounts you can use to make the most of your investments. Individual retirement accounts, or IRAs, allow you to open and manage your own retirement savings. They’re different from 401(k)s, which are employer-sponsored retirement savings plans.

Two popular types of IRAs are traditional and Roth. Both are good options to save for retirement, but there are some key differences.

Roth IRA and traditional IRA comparison

A traditional IRA allows you to make tax-deductible contributions. Once the money is in the account, it grows tax-deferred until you retire, at which point you’ll pay income taxes on your withdrawals.

With a Roth IRA, you contribute after-tax money. Your funds grow tax-free while they’re in the account, and you can withdraw them tax-free during retirement.

Here’s a look at the features of traditional IRAs and Roth IRAs.

2024 Roth IRA vs. traditional IRA at a glance

Here’s a deeper dive into the similarities and differences between traditional and Roth IRAs.

Contributions

Both accounts allow you to contribute up to $7,000 per year. If you’re 50 or older, you can contribute an additional $1,000 per year as a catch-up contribution, for a total contribution of $8,000 per year.

While the contribution limit is $7,000, you can contribute only up to your taxable compensation for the year. So if you didn’t earn at least $7,000 in a year, then your contribution is limited to the amount you earned. You can, however, qualify for a spousal IRA if your spouse has taxable compensation.

Taxes

In the case of a traditional IRA, the tax benefit comes at the time you make the contribution. You can deduct the amount you contribute from your taxable income, which reduces your tax burden for that year. When you withdraw the funds during retirement, you’ll pay income taxes on the entire amount.

“From a tax perspective, the traditional versus Roth IRA are like mirror images,” said Madison Nestor Sharick, a certified financial planner and the founder of Madi Manages Money.

With a Roth IRA, you can’t deduct your contributions, meaning they don’t lower your tax burden the year you make them. But the funds grow tax-free in your retirement account, and you can withdraw them tax-free during retirement.

As long as the money remains in the traditional or Roth IRA, you won’t pay taxes on your capital gains, dividends and interest.

“Both types of IRAs come with tax deferral(s), meaning you won’t owe taxes on investments you sell or dividends you earn over the years,” Sharick said. “Tax deferral is the unsung hero of IRAs.”

Income limits

Income limits are another key difference between Roth and traditional IRAs. Each account type does have a sort of income limit but with different consequences.

Roth IRA

Only investors who make less than a certain annual income can contribute to a Roth IRA. The IRS has a tiered system, meaning the amount you can contribute decreases as your income increases. Only workers in the lowest income tier can contribute the full $7,000 per year.

Here’s how much you can contribute based on your income.

2024 Roth IRA contribution limits

Traditional IRA

In the case of a traditional IRA, there is no income limit to be able to contribute. Whether you earn $25,000 per year or $250,000, you can contribute to a traditional IRA. But depending on your income, you may not be able to deduct your contributions.

Tip: Think about whether you’re in a lower tax bracket today than you would be in retirement. If you are, you should consider contributing your post-tax income into a Roth IRA now.

Tax deductions on contributions

While contributions to traditional IRAs are generally tax-deductible, there may be limits on the amount you can deduct or whether you can deduct your contributions at all. 

“No matter how much money you earn, you’re always permitted to contribute to a traditional IRA,” said Sharick. “But if you earn above a certain amount, deductibility of your traditional IRA contribution is the part that might go away.”

The income limits for traditional IRA deductions in the following table apply if you are covered by a retirement plan at work.

2024 deduction limits if you’re covered by a workplace retirement plan

The income limits for traditional IRA deductions in the following table apply if you are not covered by a retirement plan at work.

2024 deduction limits if you’re not covered by a workplace retirement plan

Withdrawals

Like other types of tax-advantaged retirement accounts, traditional and Roth IRAs have withdrawal restrictions.

An early withdrawal — that is, one taken before age 59½ — of contributions or earnings from a traditional IRA may trigger both income taxes and a 10% penalty.

Roth IRAs have more flexibility than traditional IRAs when it comes to early withdrawals. 

“The Roth IRA is better suited for early withdrawals because a Roth IRA allows someone to withdraw previous contributions without a penalty,” said L.J. Jones, a financial planner and the founder of Developing Financial.

That means you can withdraw contributions from a Roth IRA anytime income tax- and penalty-free. But an early withdrawal of earnings from a Roth IRA may trigger both income taxes and a 10% penalty. To withdraw earnings income tax- and penalty-free, you generally must be 59½ or older and have held the Roth IRA for at least five years.

Both traditional and Roth IRAs allow for a number of exceptions to the 10% additional penalty on early distributions, however, including the following:

• Death.
• Total and permanent disability.
• Qualified higher education expenses.
• Qualified first-time home purchases.
• Certain medical expenses.
• Certain health insurance premiums after you have received unemployment compensation.

Required minimum distributions

Certain retirement accounts have required minimum distributions (RMDs). An RMD is a minimum amount the IRS requires you withdraw from a retirement plan when you reach a certain age. Like a 401(k), a traditional IRA requires that you start taking distributions by April 1 following the year in which you turn 73.

There are no required minimum distributions with a Roth IRA during the original owner’s lifetime, meaning you can leave the money in the account as long as you want.

“If an individual never wants to take a distribution in retirement, they can do that with a Roth IRA. A traditional IRA does not have this level of control,” said Jones. “Instead, it is subject to required minimum distributions, which force people to withdraw a certain amount from their traditional IRA or else owe a tax penalty.”

Traditional or Roth IRA: Which should you choose?

Choosing between a traditional IRA and a Roth IRA can be difficult. The two accounts have different tax benefits, so how do you know which is best for your situation?

Ultimately, the simplest way to decide between a traditional and a Roth IRA is to consider your tax rate. 

If you’re a high-income earner today with a high tax rate, you may prefer to contribute to a traditional IRA and enjoy the tax benefits now. Chances are, you’ll have a lower tax rate during retirement, meaning the tax savings are more beneficial today.

But those in lower tax brackets today may find themselves in higher tax brackets during retirement. In that case, it might be better to choose a Roth IRA. You won’t get the reduced tax bill today, but you’ll enjoy tax-free distributions during retirement.

Tip: Remember that traditional and Roth IRAs are not necessarily mutually exclusive. You can have both types of accounts, amassing tax-deferred and tax-free savings over your lifetime.

Roth IRA vs. traditional IRA for a young person

For younger workers, the decision between a traditional and Roth IRA may be more clear-cut, 

Young adults are often in lower tax brackets, meaning it makes more sense financially to pay taxes now rather than later, when they could be in higher brackets. 

More importantly, they have decades in front of them to allow their retirement savings to grow. Remember that not only will contributions to a Roth IRA be tax-free in retirement; gains will be as well.

For example, if a 25-year-old were to make $7,000 in contributions each year and receive modest gains of 5% per year, they would have more than $800,000 in their IRA at age 65. But if they have a Roth account, they will have paid taxes on only $280,000 of that amount.

Where to open a traditional or Roth IRA

There are many options for opening an IRA.

IRAs can be opened through banks, other financial institutions, mutual fund companies, life insurance companies or stockbrokers. 

“Since the accounts are similar, people should open an account where the fees are the lowest and where it is convenient for them to access,” Jones said.

Roth IRA vs. traditional IRA vs. 401(k)

Roth and traditional IRAs aren’t your only retirement savings options. Many people also have access to a workplace-sponsored plan such as a 401(k).

Although not available at all employers, Roth 401(k)s provide the same tax benefits as Roth IRAs. If you are interested in a Roth account, consider whether a 401(k) may be a better choice for you.

401(k) plans have much higher contribution limits compared to IRAs. Plus, many employers match a portion of their employees’ contributions. This money can boost your account balance, so it is generally advisable to contribute enough to your 401(k) plan to receive the full match. 

Frequently asked questions (FAQs)

Can I contribute to both a Roth and traditional IRA?

Yes, you can contribute to both a Roth IRA and a traditional IRA in the same year. But the combined amount you contribute to both types of IRAs cannot exceed the annual contribution limit set by the IRS. For 2024, those limits are $7,000 or $8,000 if you are 50 or older. So you’ll need to strategize your contributions accordingly if you plan to fund both types of accounts.

What are the contribution limits for traditional and Roth IRAs?

For both traditional and Roth IRAs, you can contribute the lesser of $7,000 or your taxable compensation for the year. If you’re 50 or older, you can contribute an additional $1,000, bringing your total contribution limit up to $8,000.

What are the tax benefits of traditional and Roth IRAs?

Traditional IRA contributions are tax-deductible, meaning they reduce your taxable income in the current year. These accounts also have the benefit of tax-deferred growth.

A Roth IRA doesn’t have an upfront tax benefit, but once the money is in your account, it grows tax-free and is eligible for tax-free withdrawals during retirement.