The core difference: when you pay taxes

A Traditional IRA lets you put money in before taxes are taken out of your paycheck. You do not pay federal income tax on that money until you withdraw it in retirement. A Roth IRA takes money after taxes have already been withheld. You pay taxes now, but withdrawals in retirement are tax-free.

This one choice — tax now or tax later — shapes almost everything else about how each account works. The account that makes sense for you depends on whether you think your tax rate will be higher or lower when you retire than it is today.

Both are individual retirement accounts held at a bank, brokerage, or credit union. Both let you invest the money in stocks, bonds, or mutual funds. Both have annual contribution limits set by the IRS. The difference is the tax treatment and the rules around when and how you can take the money out.

Key Takeaways

  • Traditional IRA contributions may lower your taxable income this year, but you pay income tax on all withdrawals in retirement.
  • Roth IRA contributions are made with after-tax dollars, but may have access to withdrawals in retirement are completely tax-free.
  • Traditional IRAs require you to start taking withdrawals at age 73, while Roth IRAs have no withdrawal requirement during your lifetime.
  • Roth IRAs allow you to withdraw your contributions (not earnings) at any time without penalty, while Traditional IRAs charge a 10 percent penalty if you withdraw before age 59½.
  • Income limits restrict who can contribute to a Roth IRA, but there are no income limits for Traditional IRA contributions.

Tax deductions and income limits

With a Traditional IRA, you can deduct your contribution from your taxable income in the year you make it — but only if you meet certain conditions. If you or your spouse have a workplace retirement plan (like a 401(k)), the deduction phases out at higher income levels. The income thresholds change each year and depend on your filing status. If neither you nor your spouse has a workplace plan, you can deduct the full contribution no matter your income.

A Roth IRA has no deduction — you contribute after-tax money. But there are income limits for who can contribute at all. For 2024, if you are single, the ability to contribute phases out between $146,000 and $161,000 of modified adjusted gross income. If you are married filing jointly, it phases out between $230,000 and $240,000. These limits change yearly. If your income exceeds the limit, you cannot contribute to a Roth that year, though you may be able to use a "backdoor Roth" strategy (a workaround that involves contributing to a Traditional IRA first).

Withdrawals before retirement and the 10 percent penalty

If you withdraw money from a Traditional IRA before age 59½, you pay a 10 percent penalty on the amount withdrawn, plus income tax on it. There are narrow exceptions: withdrawals for a first home purchase (up to $10,000 lifetime), unreimbursed medical expenses, disability, or a few other hardships. Most early withdrawals trigger the penalty.

A Roth IRA is more flexible. You can withdraw your contributions (the money you put in) at any time, for any reason, with no penalty or tax. You cannot withdraw the earnings (investment gains) before age 59½ without penalty, unless you meet an exception. This makes a Roth useful as an emergency fund if you need it, since your own money is always accessible.

Required withdrawals in retirement

A Traditional IRA requires you to start taking withdrawals at age 73. The IRS calculates a minimum amount based on your age and account balance — this is called a required minimum distribution (RMD). You must withdraw at least that amount each year, or pay a 25 percent penalty on the shortfall (10 percent if you correct it within two years). These withdrawals are taxed as ordinary income.

A Roth IRA has no required minimum distribution during your lifetime. You can leave the money invested and untouched for as long as you live. Your beneficiaries will inherit the account, but they will have different withdrawal rules. This makes a Roth useful if you do not need the money in retirement and want to pass it to heirs tax-free.

Contribution limits and catch-up contributions

Both Traditional and Roth IRAs have the same annual contribution limit: $7,000 for 2024 if you are under age 50. If you are 50 or older, you can contribute an additional $1,000 per year as a "catch-up" contribution, for a total of $8,000. These limits are set by the IRS and change periodically.

You can only contribute money you earned from work that year. You cannot contribute more than your total earned income. If you are married and one spouse does not work, the working spouse can contribute to a spousal IRA in the non-working spouse's name, up to the same limit.

Which account makes sense for your situation

Choose a Traditional IRA if you want to lower your taxable income this year, expect to be in a lower tax bracket in retirement, or your income is too high to contribute to a Roth. Traditional IRAs also make sense if you have a workplace retirement plan and want to maximize tax-deferred savings.

Choose a Roth IRA if you expect to be in a higher tax bracket in retirement, want tax-free withdrawals later, prefer flexibility to access your contributions early, or want to leave tax-assistance programs to heirs. A Roth also makes sense if you are young and have decades for the money to grow tax-free, or if you want to avoid required withdrawals in retirement.

You can have both a Traditional and a Roth IRA at the same time. Your total contributions across both accounts cannot exceed the annual limit. Many people use both: a Traditional IRA for immediate tax savings and a Roth for tax-free growth later.

Frequently Asked Questions

Can I convert a Traditional IRA to a Roth IRA?

Yes. You can move money from a Traditional IRA to a Roth IRA at any time. You will owe income tax on the amount converted in that tax year, but the money then grows tax-free in the Roth. This is called a Roth conversion and is often used as a strategy when income is lower than usual or to move money into a Roth before income limits prevent future contributions.

What happens to my IRA when I die?

Your beneficiary inherits the account. With a Traditional IRA, they must pay income tax on withdrawals. With a Roth IRA, may have access to withdrawals are tax-free. Beneficiaries generally must withdraw the entire account within 10 years under current rules, though the rules are complex and depend on your relationship to the beneficiary.

Can I have both a Traditional and Roth IRA?

Yes, you can have both accounts open at the same time. Your total contributions to both accounts combined cannot exceed the annual limit ($7,000 in 2024 if you are under 50). Many people use this strategy to split their savings between immediate tax savings and future tax-free growth.

What if I have a 401(k) at work — can I still open an IRA?

Yes, you can open and contribute to an IRA even if you have a 401(k). However, if you have a workplace plan, the tax deduction for a Traditional IRA contribution phases out at higher income levels. A Roth IRA has no connection to a workplace plan, so income limits for Roth contributions are the same whether or not you have a 401(k).

Which account grows faster?

Both accounts grow at the same rate if you invest in the same funds. The difference is the tax treatment. A Roth grows tax-free, so you keep all the gains. A Traditional IRA grows tax-deferred, meaning you pay tax on the gains later. Over decades, the Roth often comes out ahead if tax rates stay the same or rise, because you avoid tax on all the growth.