The answer depends on your tax bracket now versus later

Neither is objectively better—they solve different problems. A traditional IRA reduces your taxable income this year, which helps if you are in a high tax bracket now. A Roth IRA costs you taxes today but lets you withdraw the money tax-free later, which helps if you expect to be in a higher tax bracket when you retire.

The real question is whether you think you will pay more in taxes on that money now or when you take it out. If you are young, early in your career, or expect your income to rise significantly, a Roth usually makes more sense. If you are near retirement, earning a lot right now, or expect your income to drop when you stop working, a traditional IRA usually makes more sense.

There is no way to know the future with certainty. But you can make a reasonable guess based on your current situation and what you expect to happen.

Key Takeaways

  • A traditional IRA reduces your taxable income this year; a Roth IRA does not, but your withdrawals in retirement are tax-free.
  • If your tax bracket is likely to be lower in retirement than it is now, a traditional IRA usually saves you more money overall.
  • If your tax bracket is likely to be higher in retirement, or if you are young and expect your income to rise, a Roth usually makes more sense.
  • You can contribute to both types in the same year, but your total contribution across both accounts cannot exceed the annual limit set by the IRS.
  • Income limits restrict who can contribute to a Roth IRA directly, but there are no income limits for a traditional IRA.

How the tax deduction works with a traditional IRA

When you put money into a traditional IRA, you can deduct that contribution from your taxable income for the year you make it. If you earn $60,000 and contribute $7,000 to a traditional IRA, you report only $53,000 as taxable income. You pay income tax on $53,000, not $60,000.

This deduction is valuable right now. It lowers your tax bill this year. But it comes with a cost: when you withdraw that money in retirement, you pay income tax on the full amount you take out. The money you contributed, the earnings it made, and everything else—all of it is taxable when it leaves the account.

The trade-off assumes your tax rate will be lower in retirement than it is now. If you earn $60,000 today and are in the 22% tax bracket, the $7,000 deduction saves you about $1,540 in taxes this year. But if you withdraw that same $7,000 in retirement when you are in the 12% bracket, you will pay only about $840 in taxes. You came out ahead.

How the Roth IRA avoids taxes on withdrawals

A Roth IRA works backward. You contribute money that has already been taxed. You get no deduction this year. But when you withdraw the money in retirement—including all the earnings it made—you owe no income tax on any of it.

This is powerful if your tax rate will be higher later. If you are 25 years old, earning $40,000, and in the 12% tax bracket, you pay tax on your $7,000 contribution now. But if that money grows to $50,000 by the time you retire, and you are then in the 24% bracket, you withdraw the full $50,000 with no tax. You avoided paying 24% tax on $50,000 of growth—that is $12,000 in taxes you did not owe.

The Roth also has no required withdrawals. With a traditional IRA, you must start taking money out at age 73 (as of 2023), whether you need it or not. With a Roth, you can leave the money alone and let it grow for as long as you live. This matters if you do not need the money and want to leave it to heirs.

Income limits that affect Roth contributions

The IRS limits who can contribute directly to a Roth IRA based on your income. The limit changes each year and depends on whether you file as single or married. For 2024, if you are single and earn more than about $146,000, you cannot contribute the full amount. If you earn more than about $161,000, you cannot contribute at all.

These limits do not apply to traditional IRAs. You can earn any amount and still contribute to a traditional IRA. However, if you have a workplace retirement plan like a 401(k), the deduction for a traditional IRA phases out at higher incomes. This is why some high earners use a strategy called a "backdoor Roth"—they contribute to a traditional IRA without taking the deduction, then convert it to a Roth.

If you are below the income limit, you have a choice. If you are above it, a traditional IRA or a backdoor Roth may be your only option.

Contribution limits and whether you can do both

The IRS sets an annual limit on how much you can contribute to IRAs combined. For 2024, that limit is $7,000 per year if you are under 50, or $8,000 if you are 50 or older. This limit applies to the total across all your IRAs—traditional, Roth, and any others.

You can split that money between a traditional and a Roth if you want. You could contribute $3,500 to each, or $7,000 to one and nothing to the other. But you cannot contribute $7,000 to a traditional IRA and then another $7,000 to a Roth. The total is the limit.

Some people use this flexibility to hedge their bets. They contribute part of their annual limit to a traditional IRA to get a tax deduction now, and part to a Roth to have tax-assistance programs later. This makes sense if you are uncertain about your future tax bracket.

What happens if your situation changes

You are not locked into your choice forever. You can convert money from a traditional IRA to a Roth IRA at any time. When you do, you pay income tax on the amount you convert, but the money then grows tax-free in the Roth.

Some people convert in years when their income is unusually low—perhaps they took time off work, had a business loss, or retired early. The tax bill is smaller because their tax bracket is lower. Others convert gradually over several years to spread the tax hit across multiple years.

You cannot undo a conversion, so it is worth thinking through. But the option exists if your circumstances change or if you realize you made the wrong choice initially.

Early withdrawal rules differ between the two

Traditional IRAs penalize you for taking money out before age 59½. You pay a 10% penalty on top of income tax. There are exceptions—you can withdraw without penalty for a first home purchase (up to $10,000 lifetime), medical expenses, or disability—but in general, the money is meant to stay put.

Roth IRAs are more flexible. You can withdraw your contributions (the money you put in) at any time, tax-free and penalty-free. You can only withdraw the earnings before 59½ if you meet certain conditions, but the contributions themselves are always accessible. This makes a Roth useful as an emergency fund if you need it.

This flexibility is another reason younger people often prefer Roths. The money is not locked away the same way.

Frequently Asked Questions

Can I have both a traditional and Roth IRA at the same time?

Yes. You can own both accounts simultaneously. Your total contribution across both cannot exceed the annual limit, but you can split your contributions however you want. Many people maintain both to diversify their tax situation.

What if I change jobs and have a 401(k) at my new employer?

You can still contribute to an IRA. However, if you have a workplace retirement plan, the tax deduction for a traditional IRA phases out at higher incomes. A Roth IRA has no such phase-out, making it a better choice for some people with workplace plans.

Do I have to choose one type and stick with it forever?

No. You can convert a traditional IRA to a Roth at any time by paying income tax on the amount converted. You can also contribute to different account types in different years. Your choice is not permanent.

Which one should I pick if I am not sure about my future income?

Consider splitting your contributions between both. Contribute part of your annual limit to a traditional IRA for the tax deduction now, and part to a Roth for tax-free growth later. This hedges your bet if you are uncertain about your future tax bracket.

What if my income is too high for a Roth IRA?

You can still contribute to a traditional IRA without a deduction, then convert it to a Roth. This is called a backdoor Roth. You will owe taxes on the conversion, but it is a legal way to fund a Roth when your income exceeds the limit.