The choice depends on your tax bracket today versus what you expect in retirement

A traditional IRA lets you deduct contributions from your taxable income this year, lowering what you owe the IRS now. You pay taxes later when you withdraw the money in retirement. A Roth IRA takes after-tax dollars now—no deduction today—but the withdrawals in retirement are tax-free. Neither is universally "better." The right one depends on whether you need a tax break right now or would rather avoid taxes later.

If you are in a high tax bracket today and expect to be in a lower one in retirement, traditional usually makes more sense. If you are in a lower bracket now and think you will earn more (and pay higher taxes) later, Roth usually wins. But there are other factors: income limits for Roth contributions, required withdrawals from traditional IRAs, and how each account interacts with Social Security and Medicare premiums.

Key Takeaways

  • Traditional IRA contributions reduce your taxable income this year; Roth contributions do not, but Roth withdrawals in retirement are tax-free.
  • You cannot contribute to a Roth IRA if your income exceeds the annual limit set by the IRS, which varies by filing status and changes each year.
  • Traditional IRAs require you to start withdrawing money at age 73 (as of 2023); Roth IRAs have no required withdrawals during your lifetime.
  • Roth conversions let you move money from a traditional IRA to a Roth and pay taxes on it now, which can be useful if you expect higher taxes later.
  • The tax savings from a traditional IRA deduction only matter if you itemize deductions or if the deduction actually lowers your tax bill.

When a traditional IRA makes sense

Choose traditional if you want to lower your taxable income this year and believe you will be in a lower tax bracket in retirement. The deduction is straightforward: contribute up to the annual limit (currently $7,000 for those under 50, $8,000 for those 50 and older, though these amounts change), and that amount comes off your 2024 taxable income. If you are self-employed or a freelancer with uneven income, a year when you earn significantly more is a good year to max out a traditional IRA.

Traditional also works well if you do not have access to a workplace 401(k) or similar plan. If you do have a 401(k) at work, the traditional IRA deduction phases out once your income reaches a certain level—the IRS calls this the "phase-out range," and it depends on your filing status and whether your employer offers a plan. Check the IRS website or your tax software to see whether your deduction is limited.

One drawback: you must start taking withdrawals at age 73, whether you need the money or not. These are called required minimum distributions (RMDs), and the IRS calculates how much based on your age and account balance. If you do not take the full amount, you face a penalty of 25% on the shortfall (reduced to 10% if you correct it within two years). If you plan to keep working or do not need the money, this forced withdrawal can be a real problem.

When a Roth IRA makes sense

Choose Roth if you are in a lower tax bracket now and expect to be in a higher one later, or if you simply want tax-free growth and withdrawals. You do not get a deduction today, but every dollar that grows inside the account comes out tax-free in retirement. For someone early in their career, this is often the better deal because you have decades for the money to compound, and you lock in today's lower tax rate.

Roth also has no required withdrawals. You can leave the money untouched for your entire life if you do not need it, which makes Roth excellent for building wealth to pass to heirs. The account can also be a safety net: you can withdraw your contributions (not the earnings) at any time without penalty, which is not true for traditional IRAs. This makes Roth slightly more flexible if an emergency hits.

The catch is the income limit. For 2024, you cannot contribute to a Roth if your modified adjusted gross income (MAGI) exceeds $146,000 (single) or $230,000 (married filing jointly)—these numbers change yearly. If your income is above the limit, you have two options: wait until your income drops, or do a backdoor Roth conversion, which involves contributing to a traditional IRA and then converting it to Roth. This is legal but requires careful execution to avoid tax complications.

How taxes work in each account

In a traditional IRA, you pay ordinary income tax on every dollar you withdraw, at whatever your tax rate is that year. If you contributed $10,000 and it grew to $50,000, you owe income tax on the full $50,000 when you take it out. This can push you into a higher tax bracket if you withdraw a large amount in a single year, or it can trigger higher Medicare premiums or reduce your Social Security benefits (both are tied to income thresholds).

In a Roth IRA, you pay no income tax on withdrawals, ever. The $50,000 comes out completely tax-free. You also do not have to worry about RMDs pushing you into a higher bracket or affecting your benefits. This tax predictability is valuable in retirement because you know exactly what you will keep.

One more wrinkle: if you have both traditional and Roth IRAs and you do a conversion, the IRS uses a "pro-rata rule." This means if you have $40,000 in traditional IRAs and $10,000 in Roth IRAs, and you convert $10,000 from traditional to Roth, 80% of that conversion ($8,000) is treated as taxable income. You cannot cherry-pick only the after-tax contributions to convert. This rule can make backdoor Roth conversions expensive if you have a large traditional IRA balance.

Contribution limits and income phase-outs

For 2024, you can contribute up to $7,000 to either account (or $8,000 if you are 50 or older). You can split this between traditional and Roth, but the total across both cannot exceed the limit. You must have earned income in the year you contribute—you cannot fund an IRA with investment returns or gifts.

Traditional IRA contributions are always allowed regardless of income, but the deduction phases out if you have a workplace retirement plan and earn above a certain amount. For 2024, the phase-out begins at $77,000 (single) or $123,000 (married filing jointly) if you have a 401(k) or similar plan. If you do not have a workplace plan, there is no income limit on the deduction.

Roth contributions phase out completely if your income is too high. For 2024, the phase-out range is $146,000 to $161,000 (single) or $230,000 to $240,000 (married filing jointly). Once you exceed the upper limit, you cannot contribute directly to a Roth. These limits increase slightly each year.

Roth conversions and the backdoor strategy

If your income is above the Roth limit, you can still get money into a Roth through a conversion. Contribute to a traditional IRA (which has no income limit), then convert it to a Roth. You will owe income tax on any pre-tax money in the conversion, but the money is now in a Roth and grows tax-free forever.

A backdoor Roth is the same process, just named differently because it is a workaround. The IRS allows it, but it requires careful timing and record-keeping. If you have existing traditional IRA balances, the pro-rata rule kicks in and makes the conversion expensive. If you have no traditional IRAs, a backdoor Roth is straightforward: contribute $7,000 to a traditional IRA, let it sit a few days, then convert it to Roth and pay tax on the $7,000 (which is usually minimal since it has not grown yet).

Conversions are also useful if you expect a low-income year—say you took early retirement or had a business loss. Converting traditional IRA money to Roth in a year when your income is depressed means you pay less tax on the conversion. This is sometimes called a "Roth conversion ladder" when done strategically over multiple years.

How each account affects Social Security and Medicare

Traditional IRA withdrawals count as income for the purpose of calculating your Social Security tax and Medicare premiums. If you withdraw $50,000 from a traditional IRA in a year, that $50,000 is added to your other income to determine whether you owe taxes on Social Security benefits or pay higher Medicare premiums. Roth withdrawals do not count, which can save you thousands if you are managing income carefully in early retirement.

This is a major advantage of Roth that many people overlook. If you retire at 62 and claim Social Security, but you also need to withdraw from retirement savings, a Roth withdrawal will not trigger taxes on your Social Security benefits the way a traditional IRA withdrawal would. This can be the deciding factor for someone in their early retirement years.

Frequently Asked Questions

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

Yes. You can split your annual contribution between them however you like, as long as the total does not exceed the yearly limit. Many people use both: traditional for the immediate tax deduction and Roth for tax-free growth. Just remember the pro-rata rule applies if you convert traditional money to Roth later.

What happens if I withdraw money from a Roth IRA before retirement?

You can withdraw your contributions anytime without penalty or tax. Withdrawals of earnings before age 59½ are subject to income tax and a 10% penalty, unless you meet an exception (first-time home purchase, disability, or a few others). This makes Roth more flexible than traditional if you need access to your money.

Is it too late to open an IRA if I am already retired?

You can open an IRA at any age, but you must have earned income in the year you contribute. If you are fully retired with no income, you cannot fund an IRA. If you have a spouse with earned income, you may be able to fund a spousal IRA in your name using their income.

Should I convert my traditional IRA to a Roth if I expect taxes to go up?

Conversions make sense if you expect your tax rate in retirement to be higher than it is now, or if you want to lock in a lower rate before rates increase. The trade-off is paying tax on the conversion today. Run the numbers with a tax professional to see if the long-term savings outweigh the immediate cost.

What if my employer offers a 401(k)—should I still open an IRA?

Yes. You can contribute to both. Max out any employer match on the 401(k) first (assistance programs), then fund an IRA if you have room in your budget. IRAs often have lower fees and more investment choices than 401(k)s, so they are worth using even if you have a workplace plan.