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 approach: you contribute money that has already been taxed, and then withdrawals in retirement are tax-free.

This single difference cascades into everything else about how the two accounts work. The choice between them depends on whether you expect to be in a higher or lower tax bracket when you retire than you are now.

Key Takeaways

  • Traditional IRA contributions may reduce your taxable income this year, but you pay income tax on withdrawals in retirement; Roth contributions use after-tax money, but may have access to withdrawals are completely tax-free.
  • Traditional IRAs require you to start taking withdrawals at age 73 (as of 2023); Roth IRAs have no required withdrawals during your lifetime.
  • You can only contribute to a Roth IRA if your income falls below a certain threshold, which varies by filing status and changes yearly; traditional IRA contributions have no income limit.
  • Both accounts grow tax-free while the money is inside them, but the tax treatment of that growth differs when you take it out.
  • If you withdraw Roth money before age 59½, you may owe taxes and penalties on the earnings portion, though contributions can come out penalty-free.

Income limits and who can contribute

You can contribute to a traditional IRA regardless of how much you earn. However, if you or your spouse have access to a workplace retirement plan (like a 401(k)), the amount you can deduct from your taxes phases out above a certain income level. For 2024, that phase-out begins at $77,000 for single filers and $123,000 for married couples filing jointly, but you can still contribute to the account—you just cannot deduct it.

Roth IRAs have strict income limits. For 2024, you cannot contribute to a Roth if your modified adjusted gross income exceeds $161,000 (single) or $240,000 (married filing jointly). These limits change annually. If your income is above the limit, a Roth is simply not available to you, though some people use a "backdoor Roth" strategy to work around this—that involves contributing to a traditional IRA and then converting it to a Roth.

Required withdrawals in retirement

Traditional IRAs force you to start withdrawing money at age 73 (this age changed from 72 in 2023 under the SECURE 2.0 Act). The IRS calculates a minimum amount you must withdraw each year based on your age and account balance. If you do not take it, you face a penalty of 25% on the amount you should have withdrawn (reduced to 10% if you correct it within two years).

Roth IRAs have no required withdrawals while you are alive. You can leave the money untouched for as long as you want, which makes them useful if you do not need the income or want to pass the account to heirs. Your beneficiaries will have to withdraw the money, but you do not.

Withdrawal rules and penalties before retirement

With a traditional IRA, any withdrawal before age 59½ is generally subject to income tax plus a 10% early withdrawal penalty. There are narrow exceptions—for example, if you are disabled, facing substantial medical expenses, or buying your first home (up to $10,000 lifetime)—but most early withdrawals cost you.

Roth IRAs are more flexible. You can withdraw your contributions (the money you put in) at any time, tax-free and penalty-free. You cannot touch the earnings (the growth) without penalty until age 59½, unless you meet an exception. This distinction makes Roths useful as an emergency backup, since your contributions are always accessible.

Tax-free growth and may have access to distributions

Both accounts grow tax-free while the money sits inside. You do not pay annual taxes on dividends, interest, or capital gains. The difference is what happens when you take the money out.

In a traditional IRA, the entire withdrawal is taxed as ordinary income at whatever your tax rate is that year. If you contributed $5,000 and it grew to $12,000, you pay income tax on the full $12,000 when you withdraw it.

In a Roth IRA, a may have access to distribution is completely tax-free. To may have access to, you must be at least 59½ and have owned the account for at least five tax years. If you meet both conditions, you withdraw your contributions and earnings with no tax bill. If you withdraw before meeting these conditions, you owe income tax and a 10% penalty on the earnings portion only.

Spousal and inherited account rules

If you are married, you can each open your own IRA and contribute separately, even if one spouse does not work. A non-working spouse can contribute to a spousal IRA as long as the working spouse has enough earned income to cover both contributions. This applies to both traditional and Roth accounts.

When you pass a traditional or Roth IRA to a beneficiary, the rules changed significantly under the SECURE Act (2020). Most non-spouse beneficiaries must now empty the account within 10 years, though they do not have to take annual withdrawals. With a traditional IRA, beneficiaries owe income tax on withdrawals. With a Roth, beneficiaries withdraw tax-free, which is one reason some people view Roths as better for leaving money to heirs.

Contribution limits and catch-up contributions

Both traditional and Roth IRAs have the same annual contribution limit: $7,000 for 2024 (or $8,000 if you are age 50 or older, using the "catch-up" provision). This limit applies to your combined contributions across all IRAs you own—you cannot contribute $7,000 to a traditional IRA and another $7,000 to a Roth in the same year.

The limit changes annually based on inflation and is announced by the IRS each October. If you have self-employment income, you may be able to contribute more through a SEP-IRA or Solo 401(k), but those are separate account types.

Which account 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 earn too much to contribute to a Roth. It is also simpler if you do not want to think about required withdrawals—though you will have to start taking them at 73.

Choose a Roth if you expect to be in a higher tax bracket later, want tax-free withdrawals in retirement, prefer flexibility on when to withdraw, or want to leave tax-assistance programs to heirs. The Roth is also better if you want a financial cushion you can access before retirement without penalty, since contributions come out anytime.

Some people split the difference and contribute to both in the same year, as long as the combined total does not exceed the annual limit. This is called a "hybrid strategy" and can make sense if you are uncertain about your future tax situation.

Frequently Asked Questions

Can I convert a traditional IRA to a Roth?

Yes. You can convert all or part of a traditional IRA to a Roth at any time, regardless of income. You will owe income tax on the amount converted in that tax year, but once it is in the Roth, future growth is tax-free. Many people do this strategically in years when their income is lower.

What happens if I contribute too much to an IRA?

If you exceed the annual limit, the IRS charges a 6% penalty tax on the excess amount each year it stays in the account. You can fix this by withdrawing the excess and any earnings on it before your tax deadline. It is worth correcting quickly to avoid the penalty stacking up.

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

Yes, you can own both accounts simultaneously. However, your total contributions across all IRAs in a single year cannot exceed the annual limit ($7,000 in 2024). If you contribute $4,000 to a traditional IRA, you can only contribute $3,000 to a Roth that same year.

Do I have to report my IRA on my taxes?

You report traditional IRA contributions on your tax return to claim the deduction. Roth contributions do not get a deduction, so you do not report them. Withdrawals from either account must be reported, and the IRS receives a copy of the withdrawal report from your bank.

What if I need money before retirement—can I borrow from my IRA?

IRAs do not allow loans. You can withdraw money, but early withdrawals from a traditional IRA trigger taxes and penalties. With a Roth, you can withdraw contributions penalty-free, but earnings withdrawals before 59½ are penalized. Some workplace 401(k) plans do allow loans, which is one advantage they have over IRAs.