When it comes to retirement planning, IRAs (Individual Retirement Accounts) play a significant role in helping Americans secure their financial future. Two of the most popular types are the Roth IRA and the Traditional IRA. While both provide tax advantages and the opportunity to grow your retirement savings, they differ in how contributions, withdrawals, and taxes are structured. Choosing the right IRA depends on your current income, tax bracket, and retirement goals.
In this comprehensive guide, we’ll compare the features of Roth IRAs and Traditional IRAs, dive into annual limits, income thresholds, and tax implications, and help you decide which might be better suited to your financial situation.
What is a Traditional IRA?
A Traditional IRA (Individual Retirement Account) is a retirement savings account that allows you to make tax-deductible contributions, depending on your income and whether you or your spouse is covered by a retirement plan at work. The money you contribute can potentially grow tax-deferred, which means you won’t pay taxes on earnings until you withdraw the money in retirement. When you take distributions, they are taxed as ordinary income.
Here are a few things that might apply when using a Traditional IRA:
- Contributions may be tax-deductible. For example, if you’re single and your income falls below certain thresholds (set annually by the IRS), you may qualify for a full deduction. If your income is higher, you might qualify for a partial deduction—or none.
- Tax-deferred growth: Investments grow without being taxed until withdrawal
- Withdrawals are taxed as income. When you take money out in retirement, it’s generally taxed at your ordinary income tax rate.
- Contribution limits: For 2025, you can contribute up to $7,000 per year, or $8,000 if you’re age 50 or older
- Required Minimum Distributions (RMDs). Starting at age 73 (for most people turning 73 after January 1, 2023), you must begin taking withdrawals each year—whether you need the money or not.
Example:
Let’s say you contribute $6,500 to a Traditional IRA this year and deduct that amount on your tax return. If your account grows to $10,000 over time, you won’t pay taxes on that growth until you withdraw it. When you do, the full $10,000 would be taxed as income.
What is a Roth IRA?
A Roth IRA is another type of individual retirement account, but it works differently from a Traditional IRA when it comes to taxes. With a Roth IRA, the money you contribute is made with after-tax dollars, meaning you don’t get a tax deduction when you put the money in. However, your money may grow tax-free, and you might not owe any taxes when you withdraw it in retirement—if certain conditions are met.
Here’s what you might want to know about a Roth IRA:
- Contributions are not tax-deductible. You fund a Roth IRA with money you’ve already paid taxes on.
- Tax-free growth: Investments grow tax-free, and qualified withdrawals are not taxed
- Contribution limits: The same as Traditional IRAs—$7,000 per year, or $8,000 if you’re age 50 or older (2025)
- Qualified withdrawals may be tax-free. If you’re over age 59 1⁄2 and your account has been open for at least five years, you can generally withdraw both contributions and earnings tax-free.
- No RMDs. Unlike Traditional IRAs, Roth IRAs do not require you to start withdrawing money at age 73. This may be helpful if you want your savings to keep growing or you plan to leave the account to a beneficiary.
Example:
If you contribute $6,500 to a Roth IRA in 2025, you won’t deduct it from your income on that year’s tax return. But if your account grows to $10,000, and you meet the qualified withdrawal rules, you might be able to withdraw the full $10,000 in retirement without owing any taxes on it.
Roth vs Traditional IRA: Key differences
Both accounts are designed to help you save for retirement, but they work in different ways, especially when it comes to taxes, income limits, and when you can access your money.
1. Early withdrawal rules
Both accounts impose penalties and taxes for early withdrawals, but Roth IRAs are generally more flexible:
Traditional IRA: Withdrawals before age 59½ are subject to a 10% penalty plus ordinary income taxes on the amount withdrawn. Exceptions apply for cases like first-time home purchases or certain medical expenses
Roth IRA: Contributions (but not earnings) can be withdrawn at any time without taxes or penalties. Earnings withdrawn before age 59 1⁄2 may be subject to taxes and a penalty unless you meet specific criteria (e.g., using funds for qualified education expenses or a first-time home purchase).
2. IRA tax advantages
One of the key differentiators between Roth and Traditional IRAs is when the tax advantage applies:
Traditional IRA: You may qualify for a tax deduction on your contributions (depending on your income and access to a workplace retirement plan). Taxes are deferred until you take withdrawals, at which point they are taxed as ordinary income. This can be beneficial if you expect to be in a lower tax bracket during retirement.
Roth IRA: Contributions are made with after-tax dollars, but funds grow tax-free, and qualified withdrawals in retirement are 100% tax-free. This works well if you expect to be in a higher tax bracket when you retire.
3. Contribution limits
The IRS sets annual contribution limits for IRAs, which apply to Roth and Traditional accounts alike. For 2025, here’s what you need to know:
- Contribution Limit: $7,000 per year if you’re under 50.
- Catch-Up Contributions: If you’re 50 or older, you can contribute an additional $1,000, bringing the annual limit to $8,000.
- The contribution limit applies across all your IRAs. If you have both a Roth and a Traditional IRA, the total combined contributions cannot exceed $7,000 (or $8,000 for those 50+).
4. Income limits for contributions
One key difference between traditional and Roth IRA decisions is income eligibility. For 2025, your ability to contribute to a Roth IRA depends on your modified adjusted gross income (MAGI) and tax filing status:
Single Filers:
- Full contribution allowed if your Modified Adjusted Gross Income (MAGI) is less than $150,000.
- Contribution limits phase out between $150,000 and $165,000.
- No contribution is allowed if MAGI is $165,000 or more.
Married Filing Jointly:
- Full contribution allowed if MAGI is less than $236,000.
- Contribution limits phase out between $236,000 and $246,000.
- No contribution allowed if MAGI is $246,000 or more
Married filing separately (if you lived with your spouse at any point):
- Partial contribution if MAGI is less than $10,000
- No contribution allowed if MAGI is $10,000 or more
In contrast, a Traditional IRA doesn’t have income limits for making contributions. As long as you have earned income, you can put money in. However, if you or your spouse are covered by a retirement plan at work, your ability to deduct those contributions on your taxes may be reduced or eliminated, depending on your income.
For 2025, the deduction phases out for single filers with MAGI between $79,000 and $89,000, and for married couples filing jointly with MAGI between $126,000 and $146,000
5. Required minimum distributions (RMDs)
A Traditional IRA requires RMDs starting at age 73. That means you must start taking out a certain amount each year—even if you don’t need the money—and those withdrawals may be taxable.
Roth IRAs don’t have required minimum distributions during your lifetime. You can leave the money in the account as long as you want, which might give you more flexibility in retirement or for estate planning.
Roth IRA vs Traditional IRA comparison table
Here’s a breakdown of how a Traditional vs Roth IRA comparison:
Final Thoughts
Both Roth and Traditional IRAs offer valuable tax advantages and may play important roles in your retirement planning. The best choice depends on your current income, tax situation, retirement goals, and preferences for tax treatment now versus later. By understanding the differences and rules for each, you may make informed decisions as you work toward your retirement objectives.
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