Roth IRA vs. Traditional IRA (2024)

Individual retirement accounts (IRAs) are a key part of your retirement strategy. But before you open an account, you need to understand the differences between a Roth IRA and a traditional IRA. Each has its own advantages, and saving in one over the other may be a better move at different points in your retirement savings journey.

Roth IRA vs. Traditional IRA: Taxes

The difference between a traditional IRA and a Roth IRA comes down to taxes. With a Roth IRA, you contribute funds on which you’ve already paid income taxes, commonly referred to as post-tax income. With a traditional IRA, you contribute money that has not yet been taxed, so-called pre-tax income, which can lower your taxable income level today.

Ask yourself: Do you believe that you’re in a lower income tax bracket now than you may be in retirement? If so, contribute post-tax income to a Roth IRA. You pay income taxes upfront, but the bill may be much smaller than it could be if you had to pay taxes on your withdrawals in retirement.

If you think your income tax bracket may be lower in retirement, contribute pre-tax income to a traditional IRA. You’ll be paying income tax on withdrawals in retirement, but the bill may be smaller than it would be if you paid upfront today.

Roth IRA vs. Traditional IRA: Early Withdrawals

Flexible early withdrawals are a big advantage of a Roth IRA. Since a Roth IRA account is funded with dollars that you’ve already paid income taxes on, you can withdraw contributions free of taxes and penalties at any time. With traditional IRAs, penalty- and tax-free withdrawals are usually only available after you turn 59 ½.

You can still take early withdrawals from a traditional IRA, but you’ll be on the hook for income taxes, and in most circ*mstances you’ll pay the IRS a 10% early withdrawal penalty. Likewise, you must pay income taxes on early withdrawals of earnings from a Roth IRA, and you might owe a 10% IRS penalty as well.

You can avoid the 10% penalty on the early withdrawals from a traditional IRA or early withdrawals of earnings from a Roth IRA for a short list of IRS-approved purposes. These include permanent disability, paying higher education expenses or substantially equal periodic payments (SEPPs) under rule 72(t).

Roth IRA vs. Traditional IRA: Required Minimum Distributions

Once you’re retired, Roth IRAs differ from traditional IRAs in a big way: There are no required minimum distributions (RMDs) with a Roth IRA. All other tax-advantaged retirement accounts require you to begin withdrawing funds once you turn 72.

Annual RMD amounts are calculated based on your life expectancy and total account balance, although you’re under no obligation to spend your RMDs. The ability to forgo mandatory withdrawals in retirement can be a big advantage with a Roth IRA.

Roth IRA vs. Traditional IRA: Income Limits

There are income thresholds that prevent many people from contributing directly to Roth IRAs.

Meanwhile, anyone may contribute to a traditional IRA regardless of their annual income, though not everyone can deduct their contributions from their taxable income. This is determined by your income level and your and your spouse’s access to a retirement plan at work. Use this table to see what deduction you qualify for if you have access to a workplace retirement plan. The limits change slightly if your spouse has access but you do not.

If income thresholds make direct Roth IRA contributions impossible, you can always opt for a backdoor Roth IRA conversion. This is an IRS-approved strategy that allows high earners to gain access to the benefits of Roth IRA accounts that we’ll detail more below.

Traditional vs. Roth IRA: Similarities

Apart from the differences outlined above, traditional IRAs and Roth IRAs share a range of common features.

Tax-Deferred Growth of Investments

Traditional IRAs and Roth IRAs both provide tax-free investment growth. This leaves you with more of your money to compound and grow for the years and decades until you need it. In a normal investment account, you have to pay taxes whenever you sell investments for a gain or if you receive dividend payments.

Total Contribution Limits and Deadlines

Anyone with taxable income can contribute money to an individual retirement account. Total annual contribution limits are the same for traditional IRAs and Roth IRAs in 2023: $6,500, or $7,500 if you’re 50 or older. In 2024, the contribution limits for both increased by $500 to $7,000 ($8,000 if you’re 50 or older).

Contribution limits for individual retirement accounts are cumulative. This means you can’t max out both a traditional IRA and a Roth IRA, although you may contribute to each type of account during a given year.

Roth and traditional IRAs allow you to make annual contributions for a given year up until the date you file your income taxes in the following year, and you can continue making contributions for as long as you have a taxable income, no matter how old you are. You can begin making penalty-free withdrawals from your traditional or Roth IRA when you turn 59 ½.

How to Decide Between a Roth IRA and a Traditional IRA

For many retirement investors, the Roth IRA vs. traditional IRA decision is based on what they think their future tax bracket will be. The general thought is that if you expect your taxes will be higher in the future, you go with the Roth IRA, and if you think taxes will be lower, you contribute to a traditional IRA and get tax savings today while you’re hopefully in a lower tax bracket later.

“Unfortunately, there is no crystal ball to see where taxes will be later,” says Katie Brewer, a certified financial planner (CFP) at Your Richest Life. While most retirees’ incomes are lower than they were in their peak earning years, that isn’t universally the case. And even if your income stays the same or decreases, tax brackets may have changed by the time you retire and you may end up owing more.

“You can also contribute to both types of accounts and hedge your tax situation,” Brewer says. “Consider contributing half, or some other percentage that works for you, to a traditional account to get some tax benefit today while contributing to a Roth IRA as well.”

Outside of a pure income analysis, there are a few other reasons to pick a traditional IRA over a Roth (and vice versa).

When to Choose a Traditional IRA vs. Roth IRA

A traditional IRA is your only option if you don’t qualify for a Roth IRA due to income restrictions. But there are other times that a traditional vs. Roth IRA could make sense, according to Brewer.

“A traditional IRA contribution could be better if you need the tax deduction this year,” Brewer says. This might be the case if you work a side gig and haven’t appropriately planned for taxes you may owe on that income. “It can also make sense if you think you’ll be in a lower tax bracket during retirement.”

When to Pick a Roth vs. Traditional IRA

On the other hand, if you meet the requirements for a Roth IRA, it can make sense to choose that account over a traditional IRA.

A Roth IRA can work as a backup account if you’re saving for things beyond retirement, whether that’s an emergency fund or future educational expenses. Contributions for either can be withdrawn tax and penalty free. You’re even able to withdraw up to $10,000 worth of investment earnings, in addition to any amount of contributions, to help fund a first home down payment.

While this versatility makes Roth IRAs invaluable, you probably shouldn’t plan to use a Roth this way if it’s your primary or only way of saving for retirement. You don’t want shorter term goals to shortchange you in retirement: Everything you withdraw early from a Roth IRA is deprived of years or decades of potential compounding.

You might also opt for a Roth IRA for the simplicity it can provide in retirement. If you’re anxious to avoid taxes and RMDs later, no matter your tax bracket, or you simply don’t want to worry about paying taxes on what you withdraw from your retirement account, a Roth IRA might make sense.

“In general, a Roth IRA can work well if you’re at least 15 years away from retirement and you want to prepay taxes for later,” Brewer says. You need some lead time with a Roth IRA because the IRS requires you to open and fund a Roth account at least five years before you withdraw from it in retirement. Otherwise, you’ll face taxes on earnings, even if you’re over 59 ½. (And if you’re under, you’ll owe a 10% penalty.)

How to Convert a Traditional IRA to a Roth IRA

If you want to invest in a Roth IRA but don’t meet the income requirements, you can still take advantage of the tax-free growth and distributions down the road through a backdoor Roth conversion.

With this tax workaround, you take contributions made to a traditional IRA, pay any taxes you might owe on contributions and investment growth now, and then benefit from tax-free compounding and withdrawals later.

How to Open an IRA

Most major brokerages offer both Roth and traditional IRAs. You’ll want to look for brokerages with low-cost index funds and low or no account or trading fees.

Check out our guide to saving for retirement for tips on which investments to choose and how to build a portfolio. If you feel more comfortable with someone else making those decisions for you, consider target-date funds or retirement accounts at robo-advisors. You’ll pay a small premium, but their hands-off, set-it-and-forget nature may be worth that to you.

Regardless of your choices in retirement savings vehicles and investments, remember that in the end, these choices are less important than building a habit of saving for retirement and consistently growing your nest egg.