Should I Contribute to Roth or Traditional IRA?

Individual Retirement Arrangements, or IRAs, offer tax advantages for personal retirement savings. The choice between the two main types, Traditional and Roth, depends on your current financial situation and your expectations for the future. Understanding the rules and benefits of each account is necessary to make an informed choice that aligns with your retirement strategy.

Understanding the Traditional IRA

A Traditional IRA is a retirement savings plan that allows your contributions to potentially be tax-deductible, lowering your immediate tax bill. For 2025, the annual contribution limit for IRAs is $7,000, or $8,000 if you are age 50 or older. The funds within the account grow tax-deferred.

The deductibility of your contributions depends on your income and whether you or your spouse are covered by a retirement plan at work, such as a 401(k). If neither you nor your spouse has a workplace plan, you can deduct your full contribution regardless of income. If you are covered by a workplace plan, your ability to deduct contributions is subject to income limitations set by the IRS.

For 2025, if you are a single filer covered by a workplace plan, your deduction begins to phase out with a Modified Adjusted Gross Income (MAGI) between $79,000 and $89,000. For those who are married and filing jointly, where the contributing spouse is covered by a plan, the phase-out range is between $126,000 and $146,000. If you are not covered by a workplace plan but your spouse is, the income phase-out range for your deduction is set between $236,000 and $246,000.

When you reach retirement, withdrawals from a Traditional IRA are taxed as ordinary income. This applies to both your deductible contributions and any earnings the account has generated. If you made any non-deductible contributions, those specific amounts can be withdrawn tax-free. The IRS requires you to start taking Required Minimum Distributions (RMDs) from your Traditional IRA, which must begin at age 73.

Understanding the Roth IRA

A Roth IRA is a retirement account where you contribute after-tax dollars, so your contributions are not tax-deductible. The primary benefit is that your investments grow tax-free, and qualified withdrawals in retirement are also completely tax-free.

Eligibility to contribute directly to a Roth IRA is based on your Modified Adjusted Gross Income (MAGI). For 2025, a single filer can make a full contribution if their MAGI is less than $150,000. The ability to contribute is phased out for single filers with a MAGI between $150,000 and $165,000. For married couples filing jointly, the full contribution is allowed for a MAGI under $236,000, with the phase-out range falling between $236,000 and $246,000.

A Roth IRA offers flexibility with withdrawals. You can withdraw your original contributions at any time and for any reason, without being subject to taxes or penalties. For withdrawals of earnings to be qualified as tax- and penalty-free, the account must have been open for at least five years, and you must be at least 59½ years old.

The original account owner is not required to take Required Minimum Distributions (RMDs) during their lifetime. This allows your funds to continue growing tax-free, providing greater control over your retirement assets and offering a potential advantage for estate planning. Beneficiaries who inherit a Roth IRA, however, are subject to RMD rules.

Key Factors for Your Decision

The decision between a Roth and a Traditional IRA primarily revolves around a comparison of your current income tax rate versus your expected tax rate in retirement. If you anticipate being in a higher tax bracket during your retirement years, a Roth IRA may be more advantageous. By paying taxes on your contributions now, while you are in a lower tax bracket, you can enjoy tax-free withdrawals when your income and tax rate are higher.

Conversely, if you believe you are currently at your peak earning years and will be in a lower tax bracket in retirement, a Traditional IRA might be a better fit. Taking the tax deduction now reduces your current taxable income when you are in a higher tax bracket. You will pay taxes on the withdrawals in retirement, but the assumption is that you will be in a lower tax bracket at that time.

The rules for withdrawals also play a part in the decision. A Roth IRA offers greater flexibility because contributions can be withdrawn at any time without tax or penalty, which is useful for unexpected financial needs. The absence of RMDs for the original owner is a benefit for estate planning, whereas a Traditional IRA requires mandatory withdrawals starting at age 73.

| Feature | Traditional IRA | Roth IRA |
| :— | :— | :— |
| Contribution Tax Treatment | Potentially tax-deductible | Not tax-deductible |
| Withdrawal Tax Treatment | Taxed as ordinary income | Qualified withdrawals are tax-free |
| Required Minimum Distributions (RMDs) | Yes, starting at age 73 | No, for the original owner |
| Income Limitations for Contribution | No income limit to contribute (deductibility is limited) | Yes, based on MAGI |

Advanced Strategies and Special Situations

A Roth conversion is a process where you move funds from a pre-tax retirement account, such as a Traditional IRA, into a post-tax Roth IRA. The amount you convert is added to your taxable income for that year and is subject to ordinary income tax. This strategy can be beneficial if you expect to be in a higher tax bracket in the future or if you want to take advantage of a year where your income is temporarily lower.

For high-income earners who are ineligible to contribute directly to a Roth IRA, the “Backdoor Roth IRA” offers a workaround. This strategy involves making a non-deductible contribution to a Traditional IRA, for which there are no income limits, and then promptly converting that Traditional IRA to a Roth IRA. It is important to file IRS Form 8606 to report the non-deductible contribution and the conversion.

A consideration for anyone with existing pre-tax IRA assets who is contemplating a conversion is the pro-rata rule. The IRS requires that when you convert funds, the conversion must consist of a proportional mix of your pre-tax and after-tax IRA dollars. All of your Traditional, SEP, and SIMPLE IRAs are aggregated and treated as one single IRA for this calculation. For example, if 90% of your total IRA assets are pre-tax, then 90% of any amount you convert will be taxable.

A Spousal IRA allows a working spouse to make contributions to an IRA on behalf of a non-working or low-earning spouse. To be eligible, the couple must file a joint tax return, and their combined earned income must be at least equal to the total contributions made to both IRAs. A Spousal IRA can be either a Traditional or a Roth IRA, subject to the same rules and income limitations as a standard IRA.