Roth vs. Traditional IRA: Which Is Better for You?

Roth IRA vs. Traditional IRA: An Overview

Understanding the differences between a Roth IRA versus traditional IRA can help you decide which is better for you. A key difference between these two individual retirement accounts (IRAs) is when you pay taxes on contributions and earnings.

Traditional IRA contributions are made with pre-tax dollars—money on which you haven’t paid taxes yet. These contributions reduce your taxable income for the year in which you make them. You pay taxes on contributions and earnings when you withdraw the money.

On the other hand, Roth IRA contributions are made with post-tax dollars—money that you’ve already paid taxes on. There’s no immediate tax break (as with the traditional IRA) but when you retire and start withdrawing from your account, the money you paid in and the money earned is tax-free.

Key Takeaways

• The key difference between Roth and traditional individual retirement accounts (IRAs) lies in the timing of their tax advantages.
• With traditional IRAs, you deduct contributions now and pay taxes on withdrawals later.
• Roth IRA contributions are made with money that’s been taxed, so you get tax-free withdrawals later.
• Roth IRAs have fewer restrictions, but fewer tax breaks as well.
• Whether you think your annual income and tax bracket will be lower or higher in retirement can be a key factor in choosing your IRA.

Traditional IRAs

Traditional IRA contributions are tax-deductible on both state and federal tax returns for the year in which you make the contribution. As a result, withdrawals, which are officially known as distributions, are taxed at your income tax rate when you take them, presumably in retirement.

Contributions to traditional IRAs generally lower your taxable income in the contribution year. That lowers your adjusted gross income (AGI), possibly helping you qualify for other tax incentives you wouldn’t otherwise get, such as the child tax credit or the student loan interest deduction.

Early Withdrawals

If you withdraw money from a traditional IRA before age 59½, you’ll pay taxes on the amount withdrawn and a 10% early withdrawal penalty. You can avoid the penalty (but not the taxes) in some specialized circumstances—for example, if you use the money to pay for qualified first-time homebuyer expenses (up to $10,000) or qualified higher education expenses.

Permanent disabilities and certain levels of unreimbursed medical expenses may also be exempt from the penalty, but you’ll still pay taxes on the distribution.

Roth IRAs

You don’t get a tax deduction when you make a contribution to a Roth IRA. This means it doesn’t lower your AGI that year. But your withdrawals from your Roth IRA during retirement are tax-free. Because you paid the tax bill upfront, you won’t owe anything on the back end.

Millennials and Gen Z, in particular, can benefit from a Roth because they should have a great deal of time to grow their account balances.

Eligibility Restrictions

Roth IRAs have income-eligibility restrictions. In 2024, single filers must have a MAGI of less than $161,000, with contributions phasing out starting with a MAGI of $146,000. Married couples must have modified AGIs of less than $240,000 to contribute to a Roth, and contributions phase out starting at $230,000. For 2025, these ranges increase to $150,000 to $165,000 and $236,000 to $246,000 respectively.

No RMDs

Roth IRAs have no required minimum distributions (RMDs), which means you’re not required to withdraw any money at any age, or during your lifetime at all.

This feature makes them ideal wealth-transfer vehicles. Beneficiaries of Roth IRAs don’t owe income tax on withdrawals, either, though they are required to take distributions or else roll the account into an IRA of their own.

Unlike with a traditional IRA, you can withdraw sums equivalent to your Roth IRA contributions penalty- and tax-free before the due date of your tax return, for any reason, and even before age 59½.

Important

You can own and fund both a Roth and a traditional IRA, assuming you’re eligible for each. But your total combined deposits in all accounts must not exceed the overall IRA contribution limit for any tax year in which they’re made.

Key Differences in IRAs

Tax Breaks

Both traditional and Roth IRAs provide generous tax breaks. But when you can claim them is a matter of timing.

Traditional IRA contributions are deductible from taxes and your account grows tax-deferred. You pay taxes when you withdraw your funds in retirement. Roth IRA contributions are not deductible but your account grows tax free and you pay no taxes when you withdraw your funds in retirement.

Anyone with earned income can contribute to a traditional IRA. Whether the contribution is fully tax-deductible depends on your income and whether you (or your spouse, if you’re married) are covered by an employer-sponsored retirement plan, such as a 401(k).

Distributions

Another difference between traditional and Roth IRAs lies in withdrawals. With traditional IRAs, you have to take RMDs, which are mandatory, taxable withdrawals of a percentage of your funds—even if you don’t need the money. These must start at the age of 73 for account owners born between 1951 and 1959 and age 75 for those born in 1960 or later.

The IRS offers worksheets to calculate your annual RMD, which is based on your age and the size of your account.

Pre-Retirement Withdrawals

As mentioned, if you withdraw money from a traditional IRA before age 59½, you’ll pay taxes and a 10% early withdrawal penalty. You can avoid the penalty (but not the taxes) in some specialized circumstances: if you use the money for qualified first-time homebuyer expenses (up to $10,000) or qualified higher education expenses.

Permanent disabilities and certain levels of unreimbursed medical expenses may also be exempt from the penalty, but you’ll still pay taxes on the distribution.

In contrast, you can withdraw sums equivalent to your Roth IRA contributions penalty- and tax-free during the tax year, for any reason, even before age 59½.

Withdrawing Earnings From a Roth IRA

Different rules apply if you withdraw earnings (sums above the amount you contributed) from your Roth IRA early. You would normally get dinged on those.

If you want to withdraw earnings, you can avoid taxes and the 10% early withdrawal penalty if you’ve had the Roth IRA for at least five years and at least one of the below circumstances applies to you:

• You are at least 59½ years old.
• You have a permanent disability.
• You die and the money is withdrawn by your beneficiary or estate.
• You use the money (up to a $10,000 lifetime maximum) for a first-time home purchase.

If you’ve had the account for less than five years, you can still avoid the 10% early withdrawal penalty if:

• You’re at least 59½ years old.
• The withdrawal is due to a disability or certain financial hardships.
• Your estate or beneficiary made the withdrawal after your death.
• You use the money (up to a $10,000 lifetime maximum) for a first-time home purchase, qualified education expenses, or certain medical costs.

Roth vs. Traditional IRA: Which Is Better for You?

An important consideration when deciding between a traditional and Roth IRA is how you think your future income (and, by extension, your income tax bracket) will compare to your current situation.

In effect, you have to determine if the tax rate you pay on your Roth IRA contributions today will be higher or lower than the rate you’ll pay on distributions from your traditional IRA later.

Although conventional wisdom suggests that gross income declines in retirement, taxable income sometimes does not. Think about it. You’ll be collecting (and possibly owing taxes on) Social Security benefits, and you may have income from investments. You might opt to do some consulting or freelance work, on which you’ll have to pay self-employment tax.

And when the kids are grown and you stop adding to the retirement nest egg, you lose some valuable tax deductions and tax credits. All this could leave you with higher taxable income, even after you stop working full time.

Consider a Roth IRA

In general, if you think you’ll be in a higher tax bracket when you retire, a Roth IRA may be the better choice. You’ll pay taxes now, at a lower rate, and withdraw funds tax-free in retirement when you’re in a higher tax bracket. 

Consider a Traditional IRA

If you expect to be in a lower tax bracket during retirement, a traditional IRA might make the most financial sense. You’ll reap tax benefits today while you’re in the higher bracket and pay taxes later at a lower rate.

Can I Contribute to Both a Traditional and a Roth IRA?

You can contribute to a traditional IRA as well as a Roth IRA so long as you meet certain requirements. You can contribute only up to the maximum $7,000 annual limit—$8,000 if you are 50 or older—for 2024 and 2025 across all IRAs.

Is Maxing Out an IRA a Good Idea?

Generally speaking, yes. Even if you think the market is overpriced, it’s generally worth making the maximum contributions to your IRAs. The tax savings are likely to be far larger than the slightly inflated cost of stocks, shares, and funds.

Should I Choose a Roth or a Traditional IRA?

It depends. The key issue is whether your income tax rate, compared to today, will be greater or lesser when you begin withdrawing funds from the account. That is probably impossible to know for sure, so you are forced to make an educated guess.

The Bottom Line

Although Roth and traditional IRAs differ in many ways, they are both important, tax-advantaged ways to save for your retirement.

In addition, they don’t differ in terms of administration. Most brokerages act as custodians for both Roths and traditional IRAs with the same minimums, fees, and terms for each.