Roth IRA vs. Traditional IRA: How Taxes and Withdrawals Differ

The core difference: when you pay taxes

A traditional IRA lets you deduct contributions from your income in the year you make them, lowering your taxable income now. You pay income tax later, when you withdraw the money in retirement. A Roth IRA takes the opposite path: you contribute money that has already been taxed, and then withdrawals in retirement are tax-free.

Which one costs you less depends on whether your tax rate is higher now or in retirement. If you expect to be in a lower tax bracket after you stop working, a traditional IRA saves you money. If you expect to be in the same bracket or higher, a Roth IRA is usually the better choice.

Key Takeaways

Traditional IRA contributions reduce your taxable income this year; Roth IRA contributions do not, but withdrawals in retirement are tax-free instead of taxed.
You must start taking withdrawals from a traditional IRA at age 73; Roth IRAs have no required withdrawals during your lifetime.
Roth IRA contributions can be withdrawn at any time without penalty, but investment earnings cannot be touched before age 59½ without tax and a 10% penalty.
Income limits restrict who can contribute to a Roth IRA; traditional IRAs have no income limits, though the tax deduction phases out for high earners with a workplace retirement plan.
Both account types grow tax-free while the money is invested, and both have the same annual contribution limits.

How the tax deduction works for traditional IRAs

When you contribute to a traditional IRA, you can deduct that amount from your income on your tax return—but only if you meet certain conditions. If you do not have a workplace retirement plan (like a 401(k)), you can always deduct your full contribution. If you do have a workplace plan, the deduction phases out once your income reaches a certain level, which varies by year and filing status.

For example, if you earn $70,000 and contribute $7,000 to a traditional IRA, you might reduce your taxable income to $63,000, depending on your situation. That means you pay income tax on $63,000 instead of $70,000 for that year. The trade-off is that when you withdraw that $7,000 (plus any growth) in retirement, you owe income tax on the full amount.

Roth IRA contributions and tax-free growth

Roth IRA contributions come from money you have already paid income tax on. You do not get a tax deduction in the year you contribute. However, all the growth inside the account—dividends, interest, capital gains—accumulates tax-free. When you withdraw money in retirement, you owe no income tax on any of it, including the earnings.

This makes a Roth IRA especially powerful if you have decades until retirement, because compound growth over 30 or 40 years can be substantial, and none of it gets taxed. The longer your money sits in the account, the more the tax-free growth advantage compounds.

Income limits and who can contribute

Traditional IRAs have no income limit for contributions, but the tax deduction itself phases out if your income is high and you have access to a workplace retirement plan. Roth IRAs, by contrast, have strict income limits that determine whether you can contribute at all.

For 2024, the Roth IRA income phase-out ranges depend on your filing status and change each year. If your income exceeds the upper limit for your status, you cannot contribute directly to a Roth IRA. However, a strategy called a "backdoor Roth" allows high earners to contribute to a traditional IRA and then convert it to a Roth, though this has tax implications and works best with professional guidance.

Withdrawal rules: when you can take money out

Traditional IRA withdrawals are taxed as ordinary income, and you must begin taking withdrawals at age 73 (as of 2023; this age has been rising gradually). If you withdraw before age 59½, you typically owe a 10% early withdrawal penalty plus income tax on the amount, with some exceptions for hardship or specific life events.

Roth IRA rules are more flexible. You can withdraw your contributions (the money you put in) at any time, tax-free and penalty-free. However, you cannot withdraw the earnings (investment growth) before age 59½ without owing a 10% penalty and income tax, unless you meet an exception. There are no required withdrawals from a Roth IRA during your lifetime, which makes it useful for leaving money to heirs.

Comparing contribution limits and investment options

Both traditional and Roth IRAs have the same annual contribution limit, which the IRS adjusts each year for inflation. For 2024, that limit is $7,000 for people under age 50, and $8,000 if you are 50 or older (the extra $1,000 is called a catch-up contribution). You can invest the money in stocks, bonds, mutual funds, exchange-traded funds, and other securities within either account type.

The investment options are identical between the two account types. The difference is purely in the tax treatment of contributions and withdrawals, not in what you can buy inside the account.

Which account type makes sense for your situation

Choose a traditional IRA if you want to lower your taxable income this year, expect to be in a lower tax bracket in retirement, or have income too high for a Roth IRA. Choose a Roth IRA if you expect to be in the same or higher tax bracket in retirement, want tax-free withdrawals, prefer flexibility in when you take money out, or want to leave tax-assistance programs to heirs.

Many people benefit from having both types of accounts. You could contribute to a traditional IRA one year and a Roth the next, or split your annual contribution between them. Some employers offer both a traditional 401(k) and a Roth 401(k), which operate on similar principles. The key is understanding your current tax situation and your expectations for retirement.

Frequently Asked Questions

Can I have both a traditional IRA and a Roth IRA at the same time?

Yes. Your combined contributions to all IRAs cannot exceed the annual limit, but you can split that limit between a traditional IRA and a Roth IRA however you choose. For example, you could contribute $4,000 to a traditional IRA and $3,000 to a Roth in the same year, as long as the total does not exceed $7,000.

What happens to my Roth IRA if I die?

Your heirs inherit the account and can withdraw the money. They will owe income tax on any earnings that were in the account, but not on your original contributions. Roth IRAs are often used as an estate planning tool because of this tax advantage for heirs.

Can I convert a traditional IRA to a Roth IRA?

Yes, you can convert all or part of a traditional IRA to a Roth IRA at any time. However, you will owe income tax on the amount converted in that tax year. This is why conversions are often done in years when your income is lower, such as after retirement or a job loss.

Do I have to take withdrawals from my Roth IRA?

No. Unlike traditional IRAs, Roth IRAs have no required minimum distributions during your lifetime. You can leave the money invested and growing tax-free for as long as you want, or withdraw it whenever you choose without penalty after age 59½.

What if my income is too high for a Roth IRA?

You can use a backdoor Roth strategy: contribute to a traditional IRA (which has no income limit) and then convert it to a Roth. This works best if you have no other traditional IRA balances. Consult a tax professional, as the pro-rata rule can complicate this strategy if you have existing traditional IRA money.

This guide is for general information only and is not medical, financial, legal, or other professional advice. For decisions specific to your situation, consult a qualified professional. See our Editorial Policy.