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 when you retire, a traditional IRA saves you money. If you expect to be in the same bracket or a higher one, a Roth IRA usually wins.

Key Takeaways

  • Traditional IRA contributions reduce your taxable income this year; Roth contributions do not, but withdrawals are tax-free later.
  • You must start taking withdrawals from a traditional IRA at age 73; Roth IRAs have no required withdrawals during your lifetime.
  • Roth IRAs let you withdraw contributions (not earnings) at any time without penalty; traditional IRAs charge a 10% penalty plus income tax on early withdrawals before age 59½.
  • Income limits apply to Roth contributions if you earn above a certain threshold; traditional IRA contributions have no income limit, though the tax deduction phases out for high earners with workplace retirement plans.
  • Both accounts grow tax-free year to year, and both have the same annual contribution limit.

How contributions work and what you can deduct

With a traditional IRA, you can deduct your full contribution on your tax return if you do not have a workplace retirement plan like a 401(k). If you do have a workplace plan, the deduction phases out once your income reaches a certain level. For 2024, that phase-out begins at $77,000 for single filers and $123,000 for married filers filing jointly, though these numbers change yearly.

With a Roth IRA, there is no deduction. You contribute after-tax dollars. However, you can only contribute if your income is below a limit. For 2024, you cannot contribute to a Roth if your modified adjusted gross income exceeds $161,000 (single) or $240,000 (married filing jointly). The contribution amount phases out as you approach these thresholds.

Both account types allow you to contribute up to $7,000 per year if you are under 50, or $8,000 if you are 50 or older. These limits are the same across both types.

Withdrawals and the 10% early-withdrawal penalty

A traditional IRA penalizes you for taking money out before age 59½. You owe a 10% penalty on the amount withdrawn, plus you must pay income tax on it as ordinary income. There are narrow exceptions: withdrawals for a first home purchase (up to $10,000 lifetime), medical expenses above 7.5% of your adjusted gross income, or disability.

A Roth IRA is more flexible. You can withdraw your contributions (the money you put in) at any time, tax-free and penalty-free. You cannot withdraw the earnings (the investment gains) before age 59½ without the 10% penalty and income tax, unless you meet an exception. This makes a Roth useful as an emergency backup, though using it that way defeats the purpose of saving for retirement.

Required withdrawals in retirement

At age 73, you must begin taking required minimum distributions (RMDs) from a traditional IRA. The IRS calculates the amount based on your age and account balance, and you owe income tax on whatever you withdraw. If you do not take the full amount, you pay a 25% penalty on the shortfall (or 10% if you correct it within two years).

Roth IRAs have no required minimum distributions while you are alive. This means you can leave the money untouched to grow tax-free for as long as you want, and you can pass it to heirs without being forced to drain it. Your beneficiaries will have to withdraw it over time, but you do not.

Tax-free growth and long-term strategy

Both account types grow tax-free each year. If you invest $7,000 in either account and it grows to $50,000 over 30 years, you do not pay tax on that $43,000 in gains while the money sits in the account. The difference is what happens when you take it out.

This tax-free growth makes a Roth especially valuable if you have a long time horizon. A 25-year-old who opens a Roth and leaves it alone until 65 will have decades of tax-free compounding. A 60-year-old with only five years until retirement gets less benefit from the tax-free growth, so a traditional IRA's immediate deduction may matter more.

Spousal IRAs and income limits

If you are married and one spouse does not work, you can open a spousal IRA in that spouse's name and contribute to it using the working spouse's income. This works for both traditional and Roth IRAs. The non-working spouse can contribute up to the annual limit as long as the couple's combined income supports it.

Roth income limits apply to spousal IRAs too. If your combined income is too high, you cannot open a Roth spousal IRA, though you can still open a traditional one. Some couples use a "backdoor Roth" strategy to work around this: they contribute to a traditional IRA and then convert it to a Roth, though this has tax consequences if they already have other traditional IRA balances.

State taxes and special situations

Most states do not tax retirement account withdrawals, but a few do. If you live in a state that taxes IRA withdrawals, a Roth becomes even more attractive because those withdrawals are tax-free at both the federal and state level. A traditional IRA withdrawal would be taxed by the state as well as federally.

If you expect a large one-time income in a particular year—a bonus, a business sale, or a lump-sum inheritance—a traditional IRA contribution that year can offset that income and lower your tax bill. A Roth does not offer this benefit, but it does offer tax certainty: you know exactly what you will owe in taxes (nothing) when you withdraw.

Frequently Asked Questions

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

Yes. Your total contributions across all IRAs cannot exceed the annual limit ($7,000 in 2024 if you are under 50), but you can split that between a traditional and a Roth. Some people use this to hedge their bets on future tax rates.

What happens to my Roth IRA if I die?

Your beneficiary inherits it and must withdraw the balance over ten years (or sooner, depending on their relationship to you). The withdrawals are tax-free. With a traditional IRA, beneficiaries also inherit it, but their withdrawals are taxed as ordinary income.

Can I convert a traditional IRA to a Roth?

Yes, but you owe income tax on the amount you convert in the year you do it. If you convert $50,000 from a traditional IRA to a Roth, that $50,000 is added to your taxable income for that year. This is useful if you expect a low-income year or want to lock in a lower tax rate.

Which is better for someone who is self-employed?

Both work, but self-employed people often benefit more from a traditional IRA because the deduction lowers self-employment tax as well as income tax. However, a Roth is still valuable if you expect your tax rate to rise or want tax-free withdrawals in retirement. Consider your current income and expected retirement income.

Do I have to have earned income to open an IRA?

Yes. You must have taxable income from work (W-2 wages, self-employment income, or similar) in the year you contribute. Passive income like dividends or rental income does not count. A spousal IRA is the exception: the non-working spouse can contribute if the working spouse has enough earned income.