A Roth IRA vs. a Traditional IRA

Knowing the differences between these retirement savings accounts will help you plan whether one or both can help you meet your goals.

Written by Erin Gobler / March 3, 2022

Quick Bites

  • A traditional IRA and a Roth IRA are both tax-advantaged accounts that you can use to save for retirement.
  • With an IRA, you get an upfront tax benefit, while with a Roth IRA, you get a tax benefit on your retirement distributions.
  • An IRA makes more sense if you think your tax rate will be lower during retirement; a Roth IRA may make more sense if you think your tax rate will be higher during retirement.

When you’re saving for retirement, there are plenty of accounts you can use to make the most of your investments. Individual retirement accounts, or IRAs, allow you to open and manage your own retirement savings. That’s different from a 401(k), which is an employer-sponsored retirement savings plan that you open at the company you work at, if it’s offered.

There are also individual retirement accounts or IRAs, with the most popular types being a traditional IRA and a Roth IRA. Both can be good options to save for retirement, but there are some key differences.

Read on to find out how these two IRAs work, how they’re different, when it makes sense to open one versus the other, and where to open an IRA or Roth IRA account.

Inside this article

  1. Roth vs. traditional comparison
  2. Which should you choose?
  3. Where to open your IRA

Roth IRA and traditional IRA comparison

A traditional IRA allows you to make tax-deductible contributions. Once the money is in the account, it grows tax-free until you retire, at which point you’ll pay income taxes on your earnings.

With a Roth IRA, you contribute with after-tax money. Your funds grow tax-free while they’re in the account, and you can withdraw them tax-free during retirement.

Here’s a quick look at the features a traditional IRA and a Roth IRA have to offer.

FeaturesTraditional IRARoth IRA
Contributions$6,000 per year. $1,000 catch-up contribution age 50 or older. $6,000 per year. $1,000 catch-up contribution age 50 or older.
TaxesPre-tax contributions. Tax-deferred growth. Taxes on withdrawals during retirement. After-tax contributions. Tax-free growth. Tax-free withdrawals during retirement.
Income limitsLimited contributions after income of $204,000 for single filers and $129,000 for married filers. No contributions after income of $214,000 for single filers and $144,000 for married filers. No income limit on contributions.
Contribution tax deductionsLimited deduction after income of $68,000 for single filers or $129,000 for married filers, if you’re covered by a retirement plan at work. No deduction after income of $78,000 for single filers or $129,000 for married filers, if you’re covered by a retirement plan at work.N/A
WithdrawalsTaxes on earnings and contributions during retirement. Tax-free withdrawals of contributions anytime and tax-free withdrawals of earnings during retirement, as long as it’s been five years since your first contribution.
Early withdrawalsYou will owe income tax and a 10% penalty for early withdrawals of both contributions and earnings. Exceptions include: qualified higher education expenses; qualified first home purchase; certain major medical expenses; long-term unemployment expenses; death; disability You will owe income tax and a 10% penalty for early withdrawals of earnings only. Exceptions include: qualified higher education expenses; qualified first home purchase; certain major medical expenses; long-term unemployment expenses; death; disability
Required minimum distributions (RMDs)Mandatory starting at age 72.None

Now let’s take a closer look at each feature of a traditional and a Roth IRA.

Contributions

Both accounts allow you to contribute up to $6,000 per year. If you’re 50 or older, you can contribute an additional $1,000 per year as a catch-up contribution, for a total contribution of $7,000 per year.[1]

It’s important to note, however, that while the contribution limit is $6,000, you can only contribute as much as your earned income for the year. If you didn’t earn at least $6,000 in a year, then you’re limited to contributing the amount you did earn. You can however, qualify for a spousal IRA if you spouse has earned income and can open one in your name.

Taxes

In the case of a traditional IRA, the tax benefit comes at the time you make the contribution. You can deduct the amount you contribute from your taxable income, which helps to reduce your tax burden in that year. When you withdraw funds during retirement, you’ll pay income taxes on the entire amount.

With a Roth IRA, you can’t deduct your contributions, meaning they don’t lower your tax burden at the time. However, the funds grow tax-free in your retirement account and you can withdraw them tax-free during retirement.

While they have different tax treatments when you withdraw money during retirement, as long as the money remains in the account, you won’t pay taxes on your capital gains, dividends and interest.

Income limits

Another key difference between a Roth and a traditional IRA is their income limits. Each type of account does have some sort of income limit, but with different consequences.

Roth IRA

Only investors under a certain annual income can contribute to a Roth IRA. The IRS has a tiered system, where the amount you can contribute decreases as your income increases. Only workers in the lowest income tier can contribute the full $6,000 per year.

Here’s how much you can contribute based on your income[2]:

Filing statusModified AGIContribution allowed
Married filing jointly or qualified widowerLess than $204,000Up to the contribution limit
Married filing jointly or qualified widower$204,000 - $214,000A reduced amount
Married filing jointly or qualified widower$214,000 or moreNone
Married filing separatelyLess than $10,000A reduced amount
Married filing separately$10,000 or moreNone
Single, head of household, or married and both filing and living separatelyLess than $129,000Up to the contribution limit
Single, head of household, or married and both filing and living separately$129,000 - $144,000A reduced amount
Single, head of household, or married and both filing and living separately$144,000 or moreNone

Traditional IRA

In the case of a traditional IRA, there is no income limit to be able to contribute. Whether you earn $25,000 per year or $250,000, you can contribute to a traditional IRA. However, depending on your income, you may not be able to deduct your contributions.

Tip: Do the exercise of really thinking about whether you will be in a lower tax bracket now than you will be in retirement. If that’s the case, you should contribute your post-tax income into a Roth IRA now.

Tax deductions on contributions

While contributions to traditional IRAs are generally tax-deductible, there may be limits on the amount of contributions you’re allowed to deduct, or even whether you’re allowed to deduct them at all.

You need a minimum level of earned income of $6,000 to be eligible to contribute to a traditional IRA. After that, “the tax-filing status, the amount of earned income, and participation status in an employer-sponsored retirement plan determine deductibility,” says Ernest Lacroix, a financial planner and the founder of Achieve Financial Solutions.

The income limitations in this table for traditional IRA deductions apply only if you or your spouse already have a retirement plan at work (otherwise you can deduct your full contributions no matter what your income level is).[3]

Filing statusModified AGIDeduction allowed
Married filing jointly or qualified widower $109,000 or lessFull deduction
Married filing jointly or qualified widower $109,000 - $129,000Partial deduction
Married filing jointly or qualified widower $129,000 or moreNo deduction
Married filing separatelyLess than $10,000Partial deduction
Married filing separately$10,000 or moreNo deduction
Single or head of householdUp to $68,000Full deduction
Single or head of household$68,000 - $78,000Partial deduction
Single or head of household$78,000 or moreNo deduction

Withdrawals

As with other types of tax-advantaged retirement accounts, both traditional and Roth IRAs have restrictions around withdrawals. For both accounts, you can’t make withdrawals from your account until you reach age 59½. However, both accounts allow for a number of exceptions, including[4]:

  • Death

  • Disability

  • Qualified higher education expenses

  • Qualified first-time home purchase

  • Unreimbursed medical expenses

  • Health insurance premiums paid while unemployed

While the age requirement is the only restriction for withdrawals from a traditional IRA, Roth IRA distributions have an additional requirement. To make a qualified distribution from a Roth IRA, you must do so at least five years after the beginning of the first tax year in which a contribution was made. So if you opened your IRA and made your first contribution in 2020, you couldn’t make a qualified withdrawal until 2025, even if you had already reached age 59½.[5]

Early Withdrawals

In the situation of an early withdrawal, both traditional and Roth IRAs charge a 10% tax if you don’t meet one of the above withdrawal exceptions.

However, “the Roth IRA is better suited for early withdrawals because a Roth IRA allows someone to withdraw previous contributions without a penalty,” says L.J. Jones, a financial planner and the founder of Developing Financial.

Keep in mind that even with a Roth IRA, you still can’t withdraw your earnings without being subject to the 10% penalty. In the case of a traditional IRA, the penalty applies to both contributions and earnings.

Required Minimum Distributions

Certain retirement accounts have required minimum distributions (RMDs), where the IRS requires you to start withdrawing money by a certain age. Similar to a 401(k) plan, a traditional IRA requires that you start taking distributions by April 1 following the year in which you turn 72.[6]

But with a Roth IRA, there are no required minimum distributions, meaning you can leave the money in the account as long as you want. As a result, the Roth IRA is a popular savings tool for those who want to pass along an inheritance to the next generation.

“If an individual never wants to take a distribution in retirement, they can do that with a Roth IRA. A traditional IRA does not have this level of control,” says Jones. “Instead, it is subject to required minimum distributions, which force people to withdraw a certain amount from their traditional IRA or else owe a tax penalty.”

Should you choose a traditional or Roth IRA?

Choosing between a traditional IRA and a Roth IRA can be a difficult decision. The two accounts have very different tax benefits, so how do you know which is best for your situation?

“The decision on where to make your annual contributions can be based on several factors, such as one’s current income tax situation, projected annual income in retirement and assumed tax rates in retirement, to name a few,” says Lacroix.

Ultimately, the simplest way to decide between a traditional and a Roth IRA is to consider your tax rate. If you’re a high-income earner today with a high tax rate, you may prefer to contribute to a traditional IRA and enjoy the tax benefits today. Chances are, you’ll have a lower tax rate during retirement, meaning the tax savings are more beneficial now.

However, those in a lower tax rate today may find themselves in a higher tax rate at retirement. In that case, it might be better to choose a Roth IRA. You won’t get the reduced tax bill today, but you’ll enjoy tax-free distributions during retirement.

“When it comes to deciding between a traditional or a Roth IRA, it is important to note that the decision is not necessarily mutually exclusive,” says Lacroix. “Retirement savers can have both types of accounts and can amass both tax-deferred and tax-free savings over their lifetime.”

Where to open a traditional or Roth IRA

There are many options for where to open an IRA.

“IRAs can be opened through banks, other financial institutions, mutual fund companies, life insurance companies or through a stockbroker,” says Jones. “Since the accounts are similar, people should open an account where the fees are the lowest and where it is convenient for them to access.”

Article Sources
  1. “Retirement Topics - IRA Contribution Limits,” IRS, https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits.
  2. “Amount of Roth IRA Contributions That You Can Make for 2022,” IRS, https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2022.
  3. “2022 IRA Contribution and Deduction Limits Effect of Modified AGI on Deductible Contributions If You ARE Covered By a Retirement Plan at Work,” IRS, https://www.irs.gov/retirement-plans/plan-participant-employee/2022-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-covered-by-a-retirement-plan-at-work.
  4. “Retirement Topics - Exceptions to Tax on Early Distributions,” IRS, https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions.
  5. “Publication 590-B (2020), Distributions from Individual Retirement Arrangements (IRAs),” IRS, https://www.irs.gov/publications/p590b#en_US_2020_publink1000231059.
  6. “Traditional and Roth IRAs,” IRS, https://www.irs.gov/retirement-plans/traditional-and-roth-iras.

About the Authors

Erin Gobler

Erin Gobler

Erin is a personal finance expert and journalist who has been writing online for nearly a decade. Erin’s work has appeared in major financial publications, including Fox Business, Time, Credit Karma, and more.

Full bio
Elaine King

Elaine King CFP®

Elaine has served as the Family’s Financial Planner for over 1,200 families and 100 multigenerational family enterprises crafting actionable family financial plans.

Full bio

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