When saving for retirement, one of the first considerations is whether to invest in a traditional or Roth IRA. While both offer valuable tax benefits, the benefit is realized in different ways and at different times.
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A traditional individual retirement account (IRA) offers a pre-tax benefit, lowering your taxes when you contribute to the account. A Roth IRA allows for tax-free withdrawals during retirement, which equates to tax-free capital gains. The most important factor to consider when setting up a new IRA is your expected current and future tax rates. Read on to learn the main differences so that you can make a more informed decision on which IRA is best for you.
What Is a Regular (Traditional) IRA?
A traditional individual retirement account (IRA) is a tax-advantaged savings and investment account for retirement. Contributions to a traditional IRA may be tax-deductible, depending on your income and what workplace retirement plans you have available.
Qualified contributions lower your taxable income for the year, which can lead to significant tax savings. Contributions and earnings grow without any annual taxes. Instead, qualified withdrawals during retirement are taxed as ordinary income, presumably at a lower tax rate. But if you withdraw funds before the government-allowed age, you may be subject to taxes plus a 10% penalty.
What Is a Roth IRA?
A Roth IRA is an individual retirement account with tax-free growth and tax-free qualified withdrawals in retirement. However, contributions to a Roth IRA are made with after-tax dollars. That means you don’t get any tax benefit in the year of your contribution. However, you can withdraw both contributions and investment earnings tax-free, assuming you’re at least the allowed age for tax-advantaged withdrawals.
You can withdraw contributions (not earnings) at any time without taxes or penalties. To withdraw earnings tax-free, your account must be at least five years old, and you must be 59½ or older to avoid penalties.
Key Differences Between Traditional and Roth IRAs
Not sure which IRA is right for you? Start by understanding the key differences between a regular IRA vs. Roth IRA:
| Difference | Traditional IRA | Roth IRA |
| Tax Treatment | With traditional IRAs, you can deduct your contributions from your current year’s income tax, which reduces your taxable income and potentially your tax bracket. However, when you begin to take distributions in retirement, all of the earnings will be taxed as ordinary income. | With Roth IRAs, contributions are made with after-tax income, so there is no tax break up front. The benefit of a Roth IRA, however, is that your qualified withdrawals in retirement are 100% tax-free, which include both your initial contributions and the investment earnings. |
| Withdrawal Rules | Traditional IRAs have stricter rules on withdrawals. If you withdraw any money from the account before you turn 59½, you will probably have to pay income tax on the earnings in addition to a 10% early withdrawal penalty. Some exceptions allow penalty-free early withdrawals, such as purchasing your first home or paying qualified education expenses. | Roth IRAs, on the other hand, offer more flexibility because you can always withdraw your contributions (but not the earnings) without penalty or taxes. However, you must wait until you are at least 59½ and the account must be at least 5 years old to make tax-free earnings withdrawals. |
| Required Minimum Distributions (RMDs) | Traditional IRAs require you to start taking withdrawals at age 73, even if you don’t need the money. These distributions are taxed as ordinary income and could increase your Medicare premiums or taxes on Social Security. | A Roth IRA doesn’t impose this rule throughout your lifetime. Your money can remain in the account, grow tax-free, and be passed on to heirs untouched. That flexibility can be a big advantage. |
| Income Limits for Contributions | While there are no income limits for making contributions to a traditional IRA, your ability to deduct those contributions on your tax return may be limited if you or your spouse has a workplace retirement plan. | Roth IRAs, however, do have income limits. For example, single filers with a modified adjusted gross income (MAGI) above a certain threshold will have their contributions reduced or disallowed. High-income earners may be ineligible to contribute directly to a Roth IRA. Understanding these income thresholds is important to avoid contributing ineligible amounts or losing out on tax benefits altogether. |
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For the average person, if you’re early in your career, around your 20s to 40s, a Roth IRA is almost certainly a better choice, as you have decades of tax-free investment growth for your contributions. If you’re in your 50s or older, a traditional IRA’s tax benefits may be more valuable.
When in doubt, work with a trusted tax advisor, such as a CPA or licensed tax attorney, to figure out which puts you in the best financial position.
Can I Have Both a Traditional and Roth IRA?
Yes, absolutely. Many people contribute to both traditional and Roth IRAs. The key is to ensure that you don’t contribute more than the IRS allows each year, as limits may overlap. The annual limit for 2025 is $7,000 ($8,000 if you’re age 50 or older). This total includes contributions to both traditional and Roth accounts, so you could split it between them however you like.
One advantage to having both types of accounts is that you can use them to diversify your tax position. Some of your retirement savings are taxed upfront, some are tax-deferred, and some grow tax-free. This may provide you with more flexibility during retirement, as you have more options for withdrawing your savings and managing your tax liability. Many financially savvy households have an IRA and a Roth IRA for each spouse, and contribute the maximum allowed each calendar year to the one that offers the biggest financial benefit for that particular year.
Regular IRA vs. Roth IRA: How To Make the Right Choice
Deciding on a Roth IRA vs. a regular IRA ultimately comes down to your current income, tax bracket, expected long-term income and taxes, and financial goals.
Do you want to lower your taxes now, or save on taxes in the future? Is retirement just around the corner, or is it decades off? Those are the first questions to ask yourself when choosing an account.
You can choose to contribute to both regular and Roth IRAs, so long as you don’t exceed the annual contribution limit. You can keep both, knowing they’re standing by for the future, but there’s no obligation to contribute to one over the other in any specific year.
Take your time comparing your options or ask a financial advisor for help so that you can make a well-informed decision for your financial future.
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About the Author
Reviewed by Eric Rosenberg
Eric Rosenberg, MBA, CFEI®, was born in Minneapolis and raised in Denver. He received a BSBA in Finance from the University of Colorado at Boulder in 2007 and an MBA in Finance from the University of Denver in 2010. He is currently the Treasurer of the College Area Community Council in Ventura, CA; a Cubmaster of Pack 3179; and a Certified Financial Education Instructor (CFEI). The most rewarding part of his job is helping people improve their finances. His areas of expertise include banking, investing, credit cards, credit building, debt management, and small business finance. In his free time, he enjoys spending time with his beautiful family, enjoying the outdoors, tinkering with computers, and traveling the world.
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