What a Traditional IRA and Roth IRA Do

A traditional IRA lets you set aside money for retirement and deduct what you contribute from your taxable income in the year you contribute it — which lowers your tax bill that year. You pay taxes later, when you withdraw the money in retirement. A Roth IRA works the opposite way: you contribute money that has already been taxed, the money grows tax-free, and you withdraw it tax-free in retirement.

For lower-income workers, the difference matters because your tax bracket now is probably lower than it will be later — or you may owe little or no federal tax at all. A Roth IRA means you lock in your current low tax rate on the money you save. A traditional IRA gives you a tax break immediately, which can matter more if you are working and want to reduce what you owe this year.

Both accounts let your money grow without being taxed on the gains each year, which is the real advantage. Over decades, that compounds into significantly more than you would have in a regular savings account.

Key Takeaways

  • A Roth IRA is often better for lower-income workers because you pay tax now at a low rate, then withdraw money tax-free in retirement.
  • A traditional IRA reduces your taxable income this year, which helps if you want to lower your current tax bill or claim a larger tax refund.
  • For 2024, you can contribute up to $7,000 per year to either type of IRA if you are under 50, or $8,000 if you are 50 or older.
  • Income limits apply to Roth IRAs but not traditional IRAs, though traditional IRA deductions phase out if you have a workplace retirement plan and earn above a certain amount.
  • You can open an IRA at most banks, credit unions, and investment firms, and you do not need much money to start — some allow accounts with $1 or less.

Income Limits for Roth IRAs

Roth IRAs have income thresholds. If your income is above the limit, you cannot contribute to a Roth IRA directly. For 2024, the phase-out range for single filers begins at $146,000 and ends at $161,000 of modified adjusted gross income. For married couples filing jointly, it begins at $230,000 and ends at $240,000. These numbers change each year.

If your income is below these limits, you can contribute the full amount. If you are between the lower and upper limit, you can contribute a partial amount. If you are above the upper limit, you cannot contribute to a Roth IRA that year — but you can still open a traditional IRA.

A workaround exists called a backdoor Roth: you contribute to a traditional IRA (which has no income limit), then convert it to a Roth IRA. This is legal but has tax consequences if you already have other traditional IRAs with pre-tax money in them. Talk to a tax preparer before attempting this.

Traditional IRA Deduction Limits

Traditional IRAs have no income limit for contributions, but the amount you can deduct from your taxes does phase out if you have access to a workplace retirement plan like a 401(k) and earn above a certain amount. For 2024, if you are single and covered by a workplace plan, the phase-out begins at $77,000 and ends at $87,000. If you are married filing jointly and your spouse has a workplace plan, it begins at $123,000 and ends at $143,000.

If your income is below these thresholds, you can deduct the full contribution. If you are above them, you cannot deduct any of it — though you can still contribute to the account, and the money will grow tax-free. If you do not have access to a workplace retirement plan, you can deduct the full contribution no matter your income.

These limits also change yearly. Check the IRS website or ask your bank when you open the account to confirm the current year's numbers.

How Much You Can Contribute Each Year

For 2024, you can put up to $7,000 into an IRA (either traditional or Roth, or a combination of both) if you are under 50 years old. If you are 50 or older, you can contribute an extra $1,000, for a total of $8,000. This is called a catch-up contribution and is designed to help people save more as they approach retirement.

You do not have to contribute the maximum. You can contribute any amount up to the limit, and you can change how much you contribute from year to year. If you have little income one year, you might contribute $500. The next year, if you earn more, you might contribute $3,000. There is no penalty for contributing less than the maximum.

The deadline to contribute for a given tax year is usually April 15 of the following year (or the next business day if April 15 falls on a weekend). If you contribute after that date, it counts toward the next year's limit.

Where to Open an IRA and What You Need

You can open an IRA at most banks, credit unions, brokerage firms, and online investment platforms. Common places include Vanguard, Fidelity, Charles Schwab, your local bank, and many others. Each charges different fees and offers different investment options, so it is worth comparing a few.

To open an account, you will need a Social Security number, proof of identity (like a driver's license), and proof of address (like a utility bill or lease). Some institutions let you open an account online in minutes. You do not need a large sum to start — many allow you to open an account with $1 or even $0, though some have minimum opening deposits of $500 or $1,000.

Once the account is open, you choose how to invest the money. Options usually include mutual funds, individual stocks, bonds, or money market funds. If you are not sure what to choose, many institutions offer target-date funds, which automatically adjust the mix of investments as you get closer to retirement.

Roth vs. Traditional: Which Makes Sense for You

Choose a Roth IRA if you expect to be in a higher tax bracket in retirement than you are now, or if you want to avoid required withdrawals later. Roth IRAs have no required minimum distributions — you can leave the money untouched as long as you want. This is useful if you do not need the money and want to pass it to heirs.

Choose a traditional IRA if you want to reduce your taxable income this year, or if you expect to be in a lower tax bracket in retirement. The immediate tax deduction can also help if you are close to a threshold for other tax credits or benefits — for example, if lowering your income would let you claim a larger Earned Income Tax Credit.

Many people use both: they contribute to a traditional IRA to get the tax deduction now, and also contribute to a Roth IRA to build tax-free savings for later. You can split your $7,000 annual contribution between the two accounts however you want, as long as the total does not exceed the limit.

Withdrawals and Penalties

With a traditional IRA, you can withdraw money starting at age 59½ without penalty. If you withdraw before that age, you pay a 10% penalty on the amount withdrawn, plus income tax on it. Some exceptions exist — for example, you can withdraw up to $10,000 penalty-free for a first home purchase, or for certain medical expenses or education costs.

With a Roth IRA, you can withdraw your contributions (the money you put in) at any time without penalty or tax. You can only withdraw the earnings (the growth) penalty-free after age 59½ and if the account has been open for at least five years. If you withdraw earnings before meeting both conditions, you pay a 10% penalty plus income tax on the earnings.

Starting at age 73, traditional IRA owners must take required minimum distributions each year, whether they need the money or not. Roth IRA owners do not have this requirement during their lifetime, which is another reason some people prefer Roths.

Frequently Asked Questions

Can I have both a traditional IRA and a Roth IRA at the same time?

Yes. Your combined contributions to both accounts cannot exceed the annual limit ($7,000 for 2024 if you are under 50), but you can split that amount between them however you want. Many people maintain both to get the benefits of each.

What if I do not have earned income — can I still open an IRA?

Generally no, but there is an exception: if you are married and your spouse has earned income, you can open a spousal IRA in your name and contribute based on your spouse's income. The contribution limit is still $7,000 per person per year.

Do I have to invest the money in stocks?

No. You can keep IRA money in a savings account, money market fund, or certificates of deposit (CDs) if you prefer lower risk. The growth will be slower, but you will not lose money to market downturns. Many people use a mix of stocks and bonds based on their age and comfort with risk.

What happens to my IRA if I lose my job?

Your IRA is yours and is not tied to your job. You can keep contributing to it as long as you have earned income from any source — including self-employment, gig work, or a new job. The account stays open and grows regardless of your employment status.

Can I withdraw money from my IRA to pay rent or bills?

You can, but it usually costs you. With a traditional IRA, you pay a 10% penalty plus income tax on the withdrawal if you are under 59½. With a Roth IRA, you can withdraw your contributions without penalty, but withdrawing earnings costs you the 10% penalty and income tax. It is generally better to leave IRA money alone unless you have no other option.