Should I Open a Roth or Traditional IRA?

An Individual Retirement Arrangement, or IRA, is a savings tool with tax advantages for retirement planning. The two main types are the Traditional IRA and the Roth IRA, which operate under different tax rules. The choice between them depends on your current income and what you expect your financial situation to be in retirement.

Core Tax Treatment Differences

The main distinction between a Roth and a Traditional IRA is when you get the tax benefit. Contributions to a Traditional IRA are often made with pre-tax dollars, allowing you to potentially deduct the contribution from your taxable income in the year you make it. This reduces your current tax liability, and the money grows tax-deferred, meaning you do not pay taxes on investment earnings each year.

This tax-deferred status continues until you take money out in retirement. At that point, all withdrawals, including contributions and earnings, are taxed as ordinary income. The tax rate you pay will be based on your total income in retirement.

A Roth IRA operates on the opposite principle. Contributions are made with after-tax dollars, so you do not receive an upfront tax deduction. The investments within a Roth IRA grow completely tax-free, and you will not owe taxes on the capital gains, dividends, or interest earned inside the account.

When you take qualified distributions from a Roth IRA in retirement, the withdrawals are entirely tax-free, including both contributions and earnings. This feature is attractive if you expect to be in a higher tax bracket during retirement than you are now.

Contribution Rules and Income Limits

The IRS sets annual limits on IRA contributions. For 2025, the maximum contribution to all your IRAs combined is $7,000. If you are age 50 or older, you can make an additional “catch-up” contribution of $1,000, for a total of $8,000. This limit applies to the total amount across all your IRA accounts.

You have until the federal tax filing deadline, typically April 15th of the following year, to make contributions for the current tax year. For example, you can make 2025 IRA contributions until the tax filing day in April 2026.

Anyone with earned income can contribute to a Traditional IRA, but the ability to deduct contributions may be limited if you or your spouse have a retirement plan at work. The deduction is phased out based on your Modified Adjusted Gross Income (MAGI). If your income exceeds the range, your deduction may be reduced or eliminated, though you can still make non-deductible contributions.

Eligibility to contribute to a Roth IRA is also tied to your MAGI. For 2025, the contribution ability for single filers phases out with a MAGI between $150,000 and $165,000. For those married filing jointly, the phase-out range is between $236,000 and $246,000. If your income is above the upper limit, you cannot contribute to a Roth IRA for that year.

Regulations for Withdrawals

Withdrawal rules are an important part of an IRA. A “qualified distribution” is one taken after you reach age 59½. For both Roth and Traditional IRAs, distributions taken before this age may be subject to a 10% early withdrawal penalty in addition to any ordinary income taxes due.

For a Roth IRA withdrawal to be completely tax-free, it must meet two conditions. First, you must be at least 59½ years old, and second, the account must have been funded for at least five years. This five-year clock starts on January 1st of the tax year of your first contribution.

If you withdraw earnings before meeting both requirements, those earnings could be subject to income tax and the 10% penalty. However, you can withdraw your direct contributions from a Roth IRA at any time, tax-free and penalty-free.

There are several exceptions to the 10% early withdrawal penalty, though you will still owe income tax on distributions from a Traditional IRA. Common exceptions include:

• Using the funds for a qualified first-time home purchase, up to a $10,000 lifetime maximum.
• Paying for qualified higher education expenses.
• In the event of death or permanent disability.
• Covering certain unreimbursed medical expenses or health insurance premiums during unemployment.

A major difference between the accounts involves Required Minimum Distributions (RMDs). You must start taking withdrawals from a Traditional IRA once you reach age 73. These RMDs are calculated annually, and failing to take the full amount results in a penalty. In contrast, Roth IRAs do not have RMDs for the original account owner, allowing the money to grow tax-free for your entire life.

A Framework for Your Decision

Choosing between a Roth and a Traditional IRA requires evaluating your current financial standing against your expected future situation. The main question is whether you believe your income and tax rate will be higher or lower in retirement than it is today. This factor is the primary determinant in deciding which account offers a better long-term tax advantage.

If you expect your income and tax rate to be higher in the future, a Roth IRA is often the better choice. This is common for young professionals or anyone anticipating significant income growth. By contributing to a Roth now, you pay taxes at your current, lower rate and can withdraw the funds tax-free in retirement when you are in a higher tax bracket.

If you are in your peak earning years and expect your income and tax rate to be lower in retirement, a Traditional IRA may be more beneficial. Making tax-deductible contributions now reduces your taxable income when your tax rate is highest. You will then pay taxes on withdrawals in retirement at what may be a lower rate.

For those uncertain about their future income, contributing to both accounts can be a good strategy. Holding both a Traditional and a Roth IRA provides flexibility in retirement to manage your taxable income by choosing which account to draw from. The absence of RMDs also makes the Roth IRA a useful tool for estate planning, as it can be passed to beneficiaries tax-free.

Related Strategies and Account Types

For individuals whose income is too high to contribute directly to a Roth IRA, a Roth conversion may be an option. This process, sometimes called a “Backdoor Roth IRA,” involves contributing to a non-deductible Traditional IRA and then converting those funds into a Roth IRA. You must pay ordinary income tax on the converted amount, but the money then grows tax-free.

The Spousal IRA allows a working individual to contribute to an IRA for their non-working or low-earning spouse. To be eligible, the couple must file a joint tax return. The total contribution for both spouses cannot exceed their combined earned income for the year, up to the annual limit for two IRAs. This rule helps families save for retirement for both partners.