The choice depends on your income now versus what you expect in retirement

A Roth IRA and a traditional IRA are both retirement savings accounts, but they tax you at opposite ends. With a traditional IRA, you may deduct contributions from your taxes this year, but you pay income tax on withdrawals in retirement. With a Roth IRA, you pay taxes on the money going in, but withdrawals in retirement are tax-free. The right choice depends on whether you think your tax rate will be higher or lower when you retire than it is right now.

If you are in a lower tax bracket today and expect to be in a higher one later, a Roth usually makes more sense—you lock in today's lower rate. If you are in a high tax bracket now and expect to be in a lower one in retirement, a traditional IRA lets you reduce your taxes immediately. Neither choice is wrong; they are just different bets about your future income and tax rates.

Key Takeaways

  • Traditional IRAs let you deduct contributions now but tax you on withdrawals later; Roth IRAs tax you now but let you withdraw tax-free later.
  • Income limits restrict who can contribute to a Roth IRA, but there are no income limits for traditional IRAs.
  • Roth IRAs have no required withdrawals in your lifetime, while traditional IRAs force you to start withdrawing at age 73.
  • If you change your mind, you can convert a traditional IRA to a Roth, though you will owe taxes on the amount converted.
  • Your current tax bracket and expected retirement tax bracket are the main factors; if you are unsure, a financial advisor can model both scenarios for you.

Income limits and who can contribute to each type

A traditional IRA has no income limits—anyone with earned income can open one and contribute up to the annual limit, which is $7,000 for 2024 (or $8,000 if you are 50 or older). You may not be able to deduct your contribution if you or your spouse has a workplace retirement plan and your income is above a certain threshold, but you can still contribute the money.

A Roth IRA has strict income limits. For 2024, if you file as single, you cannot contribute if your modified adjusted gross income (MAGI) is $161,000 or higher. If you are married filing jointly, the limit is $240,000. These limits change each year. If your income is above the limit, you cannot use a Roth—but you can convert a traditional IRA to a Roth regardless of income, which is a workaround some higher-income people use.

Tax deductions now versus tax-free withdrawals later

With a traditional IRA, you may deduct your contribution on your tax return in the year you make it. If you contribute $7,000 and you are in the 22% tax bracket, that deduction saves you about $1,540 in federal taxes that year. The money grows tax-free inside the account, but when you withdraw it in retirement, every dollar is taxed as ordinary income at whatever your tax rate is then.

With a Roth IRA, you get no tax deduction now. You contribute after-tax dollars. But the money grows tax-free, and when you withdraw it in retirement—whether that is $7,000 or $70,000—you owe zero federal income tax on it. You also do not owe taxes on the earnings. This is the main appeal of a Roth: if you believe tax rates will be higher in the future, you lock in today's rate and come out ahead.

Required withdrawals and flexibility in retirement

A traditional IRA requires you to start taking withdrawals at age 73. The IRS calculates a minimum amount each year based on your age and account balance, and you must withdraw at least that much or pay a penalty. This matters if you do not need the money—you are forced to take it out and pay taxes on it anyway.

A Roth IRA has no required withdrawals during your lifetime. You can leave the money untouched for as long as you want, and it keeps growing tax-free. This makes a Roth useful if you want to leave money to heirs—they inherit it tax-free (though they do have to withdraw it over a set period). If you do not need retirement income and want to pass wealth to your children, a Roth is usually the better choice.

Early withdrawal rules and penalties

Both account types penalize you for withdrawing before age 59½, but the rules differ. With a traditional IRA, any withdrawal before 59½ is taxed as income plus hit with a 10% penalty, with some exceptions (disability, medical expenses, first-time home purchase up to $10,000).

With a Roth IRA, you can withdraw your contributions (the money you put in) anytime without penalty or tax. You can only withdraw earnings before 59½ if you meet an exception. This makes a Roth more flexible if you think you might need access to your money—you are not locked in the same way. However, withdrawing contributions early means less money growing for retirement, so this should not be your plan.

Converting between account types

You can convert a traditional IRA to a Roth IRA at any time, regardless of income. When you do, you owe federal income tax on the amount converted in that tax year. If you convert $50,000 and you are in the 24% bracket, you owe $12,000 in taxes. This is a one-time tax bill, but after that, the money grows tax-free in the Roth.

Some people use this strategy when their income drops—say, they retire early or take a sabbatical—to convert at a lower tax rate. Others convert gradually over several years to spread the tax bill. You can also convert part of a traditional IRA and leave the rest untouched. There is no time limit on conversions, so you can do this whenever it makes sense for your situation.

Which account to choose: a practical framework

Start by asking: What is my tax bracket right now, and what do I expect it to be in retirement? If you are young, early in your career, and in a low tax bracket, a Roth usually wins—you pay little tax now and avoid it entirely later. If you are near retirement, in a high tax bracket, and expect to spend less in retirement, a traditional IRA lets you cut your taxes immediately.

Next, consider whether you need the flexibility. If you might need to access your money before retirement, a Roth is safer because you can withdraw contributions without penalty. If you want to leave money to heirs or do not want forced withdrawals, a Roth is also better. If you want to reduce your taxable income this year, a traditional IRA is the tool.

Many people benefit from having both types—some money in a traditional IRA for the immediate tax deduction and some in a Roth for tax-free growth. You can contribute to both in the same year as long as your total contributions do not exceed the annual limit ($7,000 or $8,000 if 50+). A financial advisor or tax professional can model both scenarios with your actual numbers and help you decide.

Frequently Asked Questions

Can I contribute to both a Roth and a traditional IRA in the same year?

Yes, but your total contributions to both accounts combined cannot exceed the annual limit—$7,000 for 2024 (or $8,000 if you are 50 or older). If you contribute $4,000 to a traditional IRA, you can contribute only $3,000 to a Roth that year.

What happens if my income goes above the Roth limit after I open one?

You can keep the Roth and it keeps growing tax-free. You just cannot make new contributions in years when your income is above the limit. You can still convert a traditional IRA to a Roth regardless of income, so that remains an option.

Do I have to pay taxes on Roth withdrawals if I withdraw before age 59½?

You can withdraw your contributions anytime tax-free and penalty-free. Withdrawals of earnings before 59½ are taxed as income and hit with a 10% penalty, unless you meet an exception like disability or a first-time home purchase (up to $10,000 lifetime).

If I convert a traditional IRA to a Roth, do I have to convert the whole thing?

No. You can convert part of a traditional IRA and leave the rest. This lets you spread the tax bill over multiple years if you want, or convert only the amount that fits in a lower-income year.

Which account is better if I am self-employed?

Both work, but self-employed people often benefit more from a traditional IRA or a SEP-IRA because the deduction reduces your self-employment tax, not just income tax. A tax professional can compare the two for your specific income and business structure.