There is no single "best" IRA — the right one depends on your income, whether your employer offers a retirement plan, and your tax situation right now
The three main types are the traditional IRA, the Roth IRA, and the SEP IRA (if you're self-employed). A traditional IRA lets you deduct contributions from your taxes in the year you make them, but you pay income tax on withdrawals in retirement. A Roth IRA takes contributions after tax, but withdrawals in retirement are tax-free. A SEP IRA is designed for self-employed people and small business owners who want to set aside larger amounts.
Your income and access to an employer plan narrow down which one makes sense. If your employer offers a 401(k) or similar plan, you may not be able to deduct traditional IRA contributions, or your Roth contributions may be limited. If you're self-employed, a SEP IRA often lets you save more than either traditional or Roth. The choice also depends on whether you expect to be in a higher or lower tax bracket in retirement.
Key Takeaways
- A traditional IRA reduces your taxable income now but requires you to pay income tax on withdrawals later; a Roth IRA takes after-tax money now but lets withdrawals be tax-free in retirement.
- If your employer offers a 401(k) or 403(b), your ability to deduct traditional IRA contributions phases out at higher incomes, and Roth IRA contributions may be limited or blocked entirely.
- Self-employed people and small business owners can contribute significantly more to a SEP IRA than to a traditional or Roth IRA in the same year.
- Your choice should reflect whether you expect your tax bracket to be higher or lower in retirement, not just which account sounds simpler.
Traditional IRA: Tax deduction now, taxes on withdrawal later
A traditional IRA lets you deduct your contribution from your income in the year you make it, which lowers your taxable income and often your tax bill. The money grows tax-free inside the account. When you withdraw in retirement, you pay ordinary income tax on the full amount withdrawn.
The catch: if you or your spouse have access to an employer retirement plan (a 401(k), 403(b), or government plan), your ability to deduct traditional IRA contributions phases out at higher incomes. The income thresholds change each year. For 2024, if you're covered by a workplace plan and file as single, the deduction phases out between roughly $77,000 and $87,000 of income. If you're married filing jointly and only one spouse has a workplace plan, the phase-out is higher. You can still contribute to a traditional IRA above those limits, but the contribution won't be deductible — you'll owe tax on the growth when you withdraw.
A traditional IRA makes sense if you expect to be in a lower tax bracket in retirement than you are now, or if you want to reduce your taxable income this year and don't have access to a workplace plan.
Roth IRA: No tax deduction now, tax-free withdrawals later
A Roth IRA works backward. You contribute money you've already paid income tax on. The money grows tax-free, and withdrawals in retirement are tax-free. You never have to take withdrawals at any age, which makes a Roth useful if you don't need the money and want to leave it to heirs.
The trade-off is that you get no tax deduction when you contribute. Also, Roth contributions are limited or blocked if your income is too high. For 2024, if you file as single, you can't contribute to a Roth IRA if your income exceeds roughly $161,000. If you're married filing jointly, the limit is around $240,000. These limits change yearly.
A Roth IRA makes sense if you expect to be in a higher tax bracket in retirement, if you want tax-free growth and withdrawals, or if you want flexibility — you can withdraw your contributions (not earnings) at any time without penalty, which gives you a safety net that a traditional IRA doesn't offer.
SEP IRA: For self-employed people and small business owners
A Simplified Employee Pension (SEP) IRA is designed for self-employed people, freelancers, and small business owners. You can contribute up to 25% of your net self-employment income (after the self-employment tax deduction), up to a maximum of $69,000 per year in 2024. That's much higher than the $7,000 limit for traditional and Roth IRAs.
Contributions to a SEP IRA are tax-deductible, and the money grows tax-free. You pay income tax on withdrawals in retirement, just like a traditional IRA. If you have employees, you must contribute the same percentage of their compensation that you contribute for yourself, which can get expensive — so many solo self-employed people use a SEP, but small businesses with staff sometimes choose a Solo 401(k) instead.
A SEP IRA is straightforward to set up and maintain compared to other retirement plans. It makes sense if you're self-employed and want to save significantly more than a traditional or Roth IRA allows.
Employer plans often matter more than which IRA you choose
If your employer offers a 401(k), 403(b), or similar plan, you should usually prioritize that over an IRA. Most employers match a portion of your contributions — that's assistance programs. A 401(k) also lets you contribute much more per year (up to $23,500 in 2024) than an IRA does. Even if your employer doesn't match, the higher contribution limit often makes a 401(k) the better first choice.
Once you've contributed enough to your employer plan to get the full match, then consider whether an IRA makes sense. If your income is below the phase-out limits and you don't have a workplace plan, a traditional IRA gives you an immediate tax deduction. If your income is within range and you expect higher taxes in retirement, a Roth IRA may be better. If you have both a workplace plan and an IRA, you can use them together — contribute to the 401(k) first to get the match, then max out an IRA if you want to save more.
How to decide between traditional and Roth if both are available to you
If your income is low enough that you can contribute to either a traditional or Roth IRA, the choice comes down to your tax situation. Ask yourself: do you expect to pay more in taxes now or in retirement?
Choose a traditional IRA if you're in a high tax bracket now and expect to be in a lower one in retirement, or if you want to reduce your taxable income this year. Choose a Roth if you're in a low tax bracket now and expect to be in a higher one later, or if you want tax-free withdrawals and flexibility. Some people split the difference and contribute to both in the same year, as long as their combined contributions don't exceed the annual limit ($7,000 in 2024, or $8,000 if you're 50 or older).
Income limits and phase-outs by account type
| Account Type | 2024 Income Limit or Phase-Out | Notes |
|---|---|---|
| Traditional IRA (deduction) | Phases out if you have a workplace plan; single filers start at ~$77,000 | Limits vary by filing status and whether spouse has a plan |
| Roth IRA | Single: ~$161,000; Married filing jointly: ~$240,000 | You can't contribute above these limits |
| SEP IRA | No income limit | Contribution limit is 25% of net self-employment income, up to $69,000 |
Frequently Asked Questions
Can I have both a traditional and Roth IRA at the same time?
Yes. Your combined contributions to both accounts in a single year can't exceed the annual limit ($7,000 in 2024, or $8,000 if you're 50 or older), but you can split that money between them however you want. Some people use this to hedge their tax bets — putting some money in a traditional IRA for the tax deduction now and some in a Roth for tax-free growth later.
What happens if I contribute to a Roth IRA but my income is too high?
If you contribute above the income limit, the IRS treats the excess as a non-deductible contribution. You'll owe a 6% penalty tax on the excess amount each year it stays in the account. You can fix this by withdrawing the excess contribution and any earnings on it before your tax return is due, or by doing a "backdoor Roth" conversion if you want to get the money into a Roth anyway — but that involves more steps and tax rules.
Should I max out my IRA or my employer 401(k) first?
If your employer offers a match on the 401(k), contribute enough to get the full match first — that's an immediate return on your money. After that, it depends on fees and investment options. If your 401(k) has high fees or limited investment choices, maxing an IRA next might make sense. If the 401(k) is low-cost, you might max that first, then contribute to an IRA.
Can I open an IRA if I'm self-employed with no employees?
Yes. You can open a traditional IRA, Roth IRA, or SEP IRA as a solo self-employed person. A SEP IRA lets you contribute more, but a traditional or Roth IRA is simpler if you're just starting out. You'll need to report your self-employment income on your tax return to show the IRS where the money came from.
What if I have a 401(k) at work and want to open an IRA too?
You can open an IRA, but your ability to deduct traditional IRA contributions will be limited or blocked because you have access to a workplace plan. You can still contribute to a Roth IRA if your income is below the limit. Check the income phase-out ranges for your filing status before you open the account.