Planning for retirement? Roth and Traditional IRAs have key differences regarding taxes, contributions, withdrawals, and distributions.
- Traditional Individual Retirement Accounts (IRAs) offer immediate tax benefits through tax-deductible contributions, while Roth IRAs provide tax-free withdrawals in retirement after paying taxes on contributions.
- Both IRA types have annual contribution limits of $7,000 for 2025, or $8,000 if age 50 or older.
- Anyone can contribute to a traditional IRA if they have taxable income, but their ability to contribute to a Roth IRA depends on how much they make.
- Required minimum distributions (RMDs) apply to Traditional IRAs starting at age 73, but Roth IRAs have no RMDs during the owner's lifetime.
- Traditional IRAs have a 10% penalty plus taxes on the entirety of any withdrawal made before age 59 ½, while Roth IRAs only impose a 10% penalty on withdrawals of earnings, not contributions.
IRAs are tax-advantaged investment accounts designed to help you invest and plan for retirement. These accounts offer significant benefits over traditional savings accounts by providing either immediate tax deductions or tax-free growth, depending on the type chosen.
Both Traditional and Roth IRAs share certain characteristics. They allow investments in stocks, bonds, mutual funds, and other securities, and both offer the potential for compound growth over the years.
However, there are important differences in how taxes are applied to each type of account. It all depends on your current financial situation, your expectations for retirement, and your proposed retirement savings strategy.
Traditional IRAs: Taxes on Withdrawals
A Traditional IRA operates on a “pay later” tax philosophy. It allows you to make contributions with pre-tax dollars, which may reduce your current taxable income.
In most cases, you can contribute up to $7,000 to a Traditional IRA in a given tax year. That amount is typically deductible from the current year's taxes, effectively reducing the tax bill today.[1]
Another important benefit is that funds within a Traditional IRA grow “tax-deferred.” That means you won’t pay any taxes on your investment gains, dividends, or interest until you start making withdrawals after retirement age.
Potential Tax Benefits
Deferring taxes like this may significantly increase your account’s growth potential over time. Because you aren’t paying your investment dollars to the government, more money remains invested over time.
Keep in mind that if you withdraw before the age of 59 ½, you have to pay a 10% penalty. Traditional IRAs also require you to start taking minimum distributions beginning at age 73.
Roth IRAs: Taxes on Contributions
A Roth IRA operates on a “pay now” tax strategy. Unlike Traditional IRAs, you can’t deduct contributions to your Roth IRA on your taxes during the year you make them.
The trade-off is that you may enjoy a smaller tax burden when you reach retirement age. Qualified withdrawals from a Roth IRA in retirement are completely tax-free, including all investment growth accumulated over the years.
Potential Tax Benefits
Since taxes are paid on contributions to Roth IRAs, the government imposes no required minimum distributions during the owner's lifetime. This allows Roth IRA accounts to continue growing tax-free indefinitely.
Roth IRAs also offer a unique layer of flexibility that you won’t find with a Traditional IRA. You can withdraw your principal (the amount you’ve directly invested in the account) at any time without taxes or penalties.
For example, if you contribute $5,000 to your Roth IRA and it grows by 10%, it will have a total value of $5,500. The extra $500 represents your earnings. You can withdraw the original $5,000 you contributed at any time without penalties if you need cash.
However, there are limitations on how and when you can withdraw your earnings. You must be at least 59½ years old, and your Roth IRA must be at least five years old before you can withdraw earnings without a 10% penalty.[2]
Other Key Differences: Roth IRAs vs. Traditional IRAs
Beyond how contributions and withdrawals are taxed, Roth IRAs and Traditional IRAs have other key differences and requirements that you should be aware of.
| Feature | Traditional IRA | Roth IRA |
| Eligibility | Anyone with earned income, regardless of earnings level |
Income restrictions apply: –Single: MAGI below $150,000 for full contributions –Married filing jointly: MAGI below $236,000 for full contributions –Phase-out ranges limit partial contributions |
| Age restriction | No age restrictions for contributions | No age restrictions for contributions |
| Tax Deductibility | May be tax-deductible depending on income and workplace plan participation | No tax deduction available |
| Tax Treatment of Contributions | Made with pre-tax dollars (if deductible) | Made with after-tax dollars |
| Tax Treatment of Withdrawals | Taxed as ordinary income | Tax-free for qualified withdrawls |
| Annual Contribution Limits (2025) | $7,000 (under 50) $8,000 (50 and older) |
$7,000 (under 50) $8,000 (50 and older) |
| Early Withdrawal Rules | 10% penalty plus ordinary income taxes on entire withdrawal before age 591/2 | Contributions can be withdrawn anytime without penalty Earnings subject to 10% penalty before age 591/2 |
| Five-Year Rule | Does not apply | |
| Required Minimum Distributions | Must begin at age 73 25% penalty for missed required minimum distribution |
Must hold account 5+ years for tax-free earnings withdrawls, even after age 591/2 |
| Estate Planning Benefits | Account reduced by mandatory required minimum distributions | Accounts can grow tax-free indefinitely Superior estate planning opportunities |
Eligibility Requirements
While traditional IRAs are accessible to most people, not everyone will be eligible for a Roth IRA.
Traditional IRA Eligibility
Anyone with earned income can contribute to a Traditional IRA regardless of earnings level. The definition of earned income includes wages, salaries, tips, bonuses, commissions, self-employment income, and spousal compensation for non-working spouses filing jointly.
Roth IRA Eligibility
Roth IRAs impose income restrictions that may limit or eliminate your eligibility.
For 2025, single filers must have a modified adjusted gross income (AGI) below $150,000 to make full contributions. They are eligible to make partial contributions with a modified AGI between $150,000 and $165,000.
Married couples filing jointly face a phase-out range between $236,000 and $246,000.
Both IRA types eliminate age restrictions for contributions following the SECURE Act changes. Individuals of any age can contribute if they have earned income.[3]
Contribution Limits
Both Traditional and Roth IRAs share identical contribution limits set by the IRS. For 2025, the annual contribution limit remains $7,000 for individuals under age 50, with an additional $1,000 catch-up contribution available for those age 50 and older, bringing their total to $8,000.
These limits represent the combined maximum across all the IRAs you own. You can’t contribute $7,000 to both a Traditional and Roth IRA in the same year.[4]
Required Minimum Distributions
Required minimum distribution (RMD) requirements represent a significant long-term difference between these account types.
Traditional IRA RMDs
Traditional IRAs mandate annual minimum withdrawals beginning at age 73, calculated based on account balances and life expectancy tables.
These required distributions ensure the government eventually collects taxes on previously deducted contributions and tax-deferred growth. Missing an RMD triggers severe penalties equal to 25% of the amount that should have been withdrawn.[5]
Roth IRA RMDs
Roth IRAs impose no required minimum distributions during the account owner's lifetime. This feature allows accounts to continue growing tax-free indefinitely and creates superior estate planning opportunities since beneficiaries inherit the full account value without the original owner being forced to reduce it through mandatory distributions.
Deciding Between a Roth & a Traditional IRA
Choosing between a Roth and a Traditional IRA depends on how factors like age, income, tax expectations, and retirement goals shape long-term outcomes.
Age & Career Stage
A Traditional IRA might be worthwhile if you want your investment to grow faster. This is why Traditional IRAs are often more attractive to people closer to retirement age, as they need their investments to do more for them.
The tax-free nature of Roth IRA withdrawals may make them more attractive to younger people, those expecting higher tax rates in retirement, and those who might need quick access to cash.
Current Financial Situation
The tax deduction from a Traditional IRA contribution might be attractive to you if you have a higher income, as it would allow you to reduce your tax burden. Even if you have a modest income, you may still prefer a Traditional IRA since it allows you to grow your savings faster.
On the other hand, if you don’t want to risk paying more taxes during retirement, a Roth IRA might be more attractive. You can pay taxes now and enjoy tax-free withdrawals later.
Estate Planning & Lifestyle
A Traditional IRA requires you to take ongoing distributions in retirement. It also penalizes you if you withdraw funds too early. If you want to be disciplined about saving and expect to live on a set budget in retirement, a Traditional IRA might be a good option.
However, if you plan to travel in retirement or anticipate needing large sums of cash, a Roth IRA might give you more flexibility. You may even choose to defer taking distributions if you’d like to pass your savings on to beneficiaries, like your children.
Speak with a Financial Professional About Your IRA Options
Roth and Traditional IRAs each come with meaningful advantages, but their differences in tax treatment, contribution timing, and withdrawal rules make them suitable for different types of people.
IRA decisions often intersect with the rest of your financial picture, including your plans for employment, family, and lifestyle. Talk with a qualified financial professional before deciding on a retirement strategy.
