The core difference: when you pay taxes

A Traditional IRA lets you deduct contributions from your taxes now, but you pay income tax on the money when you withdraw it in retirement. A Roth IRA takes the opposite approach: you contribute money that's already been taxed, and then withdrawals in retirement are tax-free.

Think of it as choosing when to pay the bill. With a Traditional IRA, you get a tax break today and pay later. With a Roth IRA, you pay today and get a tax break later. Which one makes sense depends on whether you think your tax rate will be higher or lower in retirement than it is right now.

Key Takeaways

  • Traditional IRA contributions may reduce your taxable income this year, but withdrawals in retirement are taxed as ordinary income.
  • Roth IRA contributions are made with after-tax money, but may have access to withdrawals in retirement come out completely tax-free.
  • You can withdraw your Roth contributions (not earnings) at any time without penalty, while Traditional IRA withdrawals before age 59½ usually trigger a 10% penalty plus taxes.
  • Traditional IRAs require you to start taking withdrawals at age 73, while Roth IRAs have no withdrawal requirement during your lifetime.
  • Income limits restrict who can contribute to a Roth IRA, but there are no income limits for Traditional IRA contributions.

How the tax deduction works with a Traditional IRA

When you contribute to a Traditional IRA, you may be able to deduct that contribution on your federal tax return in the year you make it. If you earn $60,000 and contribute $7,000 to a Traditional IRA, your taxable income drops to $53,000 (assuming you meet the may be able to access rules for the deduction). That means you pay less in taxes that year.

The catch is that this money is only tax-deferred, not tax-free. When you withdraw it later—whether at age 65 or age 75—you owe income tax on the full amount you take out. The IRS taxes it as ordinary income, at whatever your tax rate is that year. If you withdraw $50,000 in a year when you're in the 22% tax bracket, you owe roughly $11,000 in federal tax on that withdrawal.

Not every Traditional IRA contribution is deductible. If you or your spouse have a workplace retirement plan (like a 401(k)), the deduction phases out at higher income levels. The IRS sets these income thresholds each year, and they vary depending on your filing status and whether you're covered by a workplace plan.

How the Roth IRA avoids taxes on growth

With a Roth IRA, you contribute money you've already paid income tax on. You don't get a deduction. But here's the advantage: the money grows tax-free, and when you withdraw it in retirement, you owe nothing—no federal income tax, no state income tax (in most states), nothing.

If you put $7,000 into a Roth IRA and it grows to $50,000 over 30 years, you can withdraw that full $50,000 tax-free. The $43,000 in growth never gets taxed. With a Traditional IRA, that same $43,000 in growth would be taxed as ordinary income when you withdraw it.

This tax-free growth is especially valuable if you expect to be in a higher tax bracket in retirement, or if you simply want to avoid the uncertainty of not knowing what tax rates will be decades from now. You're locking in today's tax rate instead of gambling on tomorrow's.

The income limits that apply to Roth IRAs

You can only contribute to a Roth IRA if your income falls below a certain threshold. For 2024, if you're single, the limit phases out between $146,000 and $161,000 in modified adjusted gross income. If you're married filing jointly, it phases out between $230,000 and $240,000. These numbers change each year.

There are no income limits for Traditional IRA contributions—anyone with earned income can contribute. However, the tax deduction for a Traditional IRA phases out at higher incomes if you have a workplace retirement plan, which is a different rule.

If your income is above the Roth limit, you have other options. Some people use a "backdoor Roth" strategy, which involves contributing to a Traditional IRA and then converting it to a Roth, though this has tax complications you'd want to understand first.

Withdrawal rules and penalties

Traditional IRAs penalize you for taking money out before age 59½. If you withdraw before that age, you owe a 10% penalty on top of the income tax you owe on the withdrawal. There are some exceptions—first-time home purchase, disability, medical expenses—but they're narrow and require documentation.

Roth IRAs are more flexible. You can withdraw your contributions (the money you put in) at any time, tax-free and penalty-free. You can only withdraw the earnings (the growth) before age 59½ if you meet certain conditions, like a first-time home purchase up to $10,000 lifetime. But the ability to access your contributions without penalty is a real advantage if you need the money.

Starting at age 73, you must begin taking withdrawals from a Traditional IRA, whether you need the money or not. These are called required minimum distributions, or RMDs. The IRS calculates how much you must withdraw each year based on your age and account balance. Roth IRAs have no RMD requirement during your lifetime, which makes them useful if you want to let the money keep growing and pass it to heirs.

Which one makes sense for your situation

Choose a Traditional IRA if you want to reduce your taxable income this year and expect to be in a lower tax bracket in retirement. This often works well for people in their peak earning years who plan to spend less in retirement. You also have no income limits, so a Traditional IRA is your only option if you earn above the Roth threshold.

Choose a Roth IRA if you expect to be in the same tax bracket or a higher one in retirement, or if you simply want to avoid guessing about future tax rates. The tax-free growth and withdrawals are powerful over decades. The flexibility to withdraw contributions without penalty is also valuable if you might need access to the money. And if you want to leave money to heirs, a Roth avoids the tax burden you'd pass along with a Traditional IRA.

You don't have to choose one or the other forever. You can have both a Traditional IRA and a Roth IRA at the same time, though your total contributions across both accounts are limited by annual caps set by the IRS (for 2024, that's $7,000 if you're under 50, or $8,000 if you're 50 or older).

Frequently Asked Questions

Can I convert a Traditional IRA to a Roth IRA?

Yes. You can convert all or part of a Traditional IRA to a Roth by moving the money over. You'll owe income tax on the amount converted in that tax year, but after that, the money grows tax-free in the Roth. This strategy is sometimes called a "backdoor Roth" when used to get around income limits, though the tax consequences can be complex.

What happens to my IRA when I die?

Your heirs inherit the account, but the tax treatment differs. Heirs who inherit a Traditional IRA owe income tax on withdrawals. Heirs who inherit a Roth IRA can withdraw earnings tax-free if the account was open for at least five years. This makes a Roth a better wealth-transfer tool if leaving money to family matters to you.

Do I have to use my employer's 401(k) instead of an IRA?

No, they're separate. You can have both a 401(k) through work and an IRA on your own. However, if you have a 401(k), it affects whether you can deduct Traditional IRA contributions. Your Roth IRA contributions are limited by income regardless of whether you have a 401(k).

What if I need to withdraw money before retirement?

With a Traditional IRA, you'll owe a 10% penalty plus income tax on any withdrawal before age 59½, with narrow exceptions. With a Roth IRA, you can withdraw your contributions anytime without penalty, though earnings are restricted. This makes a Roth more accessible if you're unsure you can leave the money untouched.

How much can I contribute each year?

For 2024, you can contribute up to $7,000 to an IRA if you're under 50, or $8,000 if you're 50 or older. This limit applies to your combined Traditional and Roth contributions—you can't put $7,000 in each. The limit changes most years, so check the IRS website for the current year's amount.