Traditional IRA vs. Roth IRA

A Traditional IRA and a Roth IRA are both individual retirement accounts that offer tax advantages to encourage long-term savings, but they differ in when you receive the tax benefit. With a Traditional IRA, contributions may be tax-deductible in the year they are made, reducing your current taxable income. However, withdrawals in retirement are taxed as ordinary income. With a Roth IRA, contributions are made with after-tax dollars and do not provide an upfront deduction, but qualified withdrawals in retirement — including earnings — are generally tax-free.

Contribution limits are the same for both types of accounts. For 2024 and 2025, the annual contribution limit is $7,000, with an additional $1,000 catch-up contribution allowed for those age 50 and older. However, eligibility differs. Traditional IRA contributions are always allowed regardless of income, though the tax deduction may be limited if you or your spouse are covered by a workplace retirement plan and your income exceeds certain thresholds. Roth IRA contributions have income limits — above certain modified adjusted gross income (MAGI) levels, contributions are phased out entirely.

Withdrawal rules also differ significantly. Traditional IRA withdrawals before age 59½ are generally subject to a 10% early withdrawal penalty plus income tax, with some exceptions. Roth IRA contributions (not earnings) can be withdrawn at any time without penalty or tax, since they were already taxed. Roth earnings can be withdrawn tax-free and penalty-free after age 59½, provided the account has been open at least five years.

Traditional IRAs require RMDs beginning at age 73 (or 75 for those born in 1960 or later), while Roth IRAs have no RMDs during the original owner's lifetime. This distinction could make Roth IRAs attractive for those who want more flexibility in retirement or wish to leave tax-free assets to heirs.