Roth IRA Versus Traditional IRA: What’s the Difference?
Choosing between a Roth and Traditional IRA comes down to when you want your tax advantage. Learn how the timing of taxes can shape your retirement savings.
An Individual Retirement Arrangement (IRA) is a savings account with tax advantages for retirement. These accounts are established by individuals, separate from employer-sponsored plans like a 401(k). The two primary types are the Traditional IRA and the Roth IRA. The choice between them hinges on factors like current and expected future income, as their core differences lie in how contributions and withdrawals are taxed by the IRS.
Tax Treatment of Contributions
For a Traditional IRA, contributions may be tax-deductible, offering an immediate tax benefit in the year the contribution is made. This means the amount contributed can potentially lower your overall tax liability for that year. If you are not covered by a retirement plan at work, your contributions are fully deductible.
The situation changes for those who do have access to a workplace plan, such as a 401(k). For these individuals, the ability to deduct contributions is subject to Modified Adjusted Gross Income (MAGI) limitations. For the 2025 tax year, a single filer with a workplace plan can take a full deduction if their MAGI is $79,000 or less, with the deduction phasing out completely at $89,000.
For married couples filing jointly where the contributing spouse has a workplace plan, the full deduction is available with a MAGI of $126,000 or less. This deduction phases out entirely at a MAGI of $146,000.
In contrast, contributions to a Roth IRA are never tax-deductible. All money is deposited on an after-tax basis, meaning you have already paid income tax on those funds. This structure provides no immediate tax break in exchange for future tax benefits.
Tax Treatment of Withdrawals
For a Roth IRA, qualified distributions are entirely tax-free, meaning neither the original contributions nor any investment earnings are subject to federal income tax. To be considered a qualified distribution, the account owner must be at least 59½ years old or meet other specific criteria such as disability, and the account must satisfy the five-year rule. This rule requires that at least five tax years have passed since the first contribution was made to any Roth IRA.
The five-year clock starts on January 1 of the tax year for which the first contribution was made. Contributions to a Roth IRA, since they were made with after-tax money, can be withdrawn at any time and for any reason without tax or penalty.
Conversely, withdrawals from a Traditional IRA are taxed as ordinary income at your income tax rate in the year of the withdrawal. This applies to both the tax-deductible contributions and all the investment earnings that have accumulated within the account.
If an individual made non-deductible contributions to a Traditional IRA, that portion of the withdrawal is not taxed. The withdrawal is treated as a mix of pre-tax and after-tax funds, with the taxable amount calculated using IRS Form 8606.
Contribution and Eligibility Limits
For 2024 and 2025, the maximum annual contribution an individual can make to all of their IRAs combined is $7,000. Individuals age 50 or older can contribute an additional $1,000 as a “catch-up” contribution, bringing their total potential annual contribution to $8,000. This provision is designed to help accelerate savings in the final years before retirement.
Anyone with earned income can contribute to a Traditional IRA, regardless of how high their income is. The income limits previously discussed only impact the ability to deduct the contribution, not the ability to make it.
Direct contributions to a Roth IRA, however, are restricted by MAGI thresholds. For the 2025 tax year, a single filer’s ability to contribute is phased out if their MAGI is between $150,000 and $165,000, and they are ineligible if their MAGI exceeds $165,000.
For those who are married and filing jointly, the phase-out range for 2025 is a MAGI between $236,000 and $246,000. Individuals with incomes above these limits cannot make direct contributions to a Roth IRA.
Required Minimum Distributions
A long-term planning difference between the accounts involves required minimum distributions (RMDs). These are mandatory annual withdrawals from certain retirement accounts after reaching a specific age.
Traditional IRAs are subject to RMDs. Individuals who reach age 73 in 2023 or later must begin taking RMDs, and the starting age is scheduled to increase to 75 in 2033. These distributions are calculated annually based on the account balance and the owner’s life expectancy, and failure to take the correct amount on time results in a 25% tax penalty on the shortfall, which may be reduced to 10% if the mistake is corrected promptly.
Roth IRAs are not subject to RMDs for the original account owner. This allows the funds to continue growing tax-free for the owner’s entire lifetime, making the Roth IRA a powerful tool for wealth transfer. Beneficiaries who inherit a Roth IRA are generally required to take distributions from the account.
Understanding Roth Conversions
A Roth conversion allows an individual to move funds from a pre-tax retirement account, such as a Traditional IRA or a 401(k), into a post-tax Roth IRA. This process is available to anyone, regardless of income level. The amount being converted is considered taxable income in the year the conversion occurs, meaning the individual must pay ordinary income taxes on the converted funds at their current tax rate.
The motivation for a conversion is to secure tax-free growth and withdrawals in the future. An individual might choose to do this if they anticipate being in a higher tax bracket during retirement than they are now. By paying taxes on the funds at a potentially lower rate today, they can avoid higher taxes on withdrawals later.
This conversion mechanism also enables the “Backdoor Roth IRA” strategy. This is used by high-income earners who are prohibited from making direct contributions to a Roth IRA due to the MAGI limits. The process involves making a non-deductible contribution to a Traditional IRA and then converting those funds to a Roth IRA.
If done correctly, and assuming the individual has no other pre-tax funds in any Traditional IRAs, the tax impact of the conversion itself can be minimal. However, any earnings that accrue in the Traditional IRA before the conversion are taxable. The IRS pro-rata rule can also complicate this strategy if the individual holds other Traditional IRA assets, as it requires a portion of the conversion to be treated as taxable.