The choice depends on your tax bracket now versus what you expect in retirement

Choose a Traditional IRA if you want to lower your taxable income this year and expect to be in a lower tax bracket when you withdraw the money in retirement. Choose a Roth IRA if you expect to be in the same or higher tax bracket in retirement, or if you want to withdraw the money tax-free later without worrying about tax rates changing.

The core trade-off is simple: Traditional contributions reduce your taxes now; Roth contributions reduce your taxes later. Which one saves you more money depends on whether tax rates will be higher or lower when you retire than they are today.

If you are unsure which bracket you will be in at retirement, a Roth is often the safer choice because you lock in today's tax rate and never pay taxes on the growth. With a Traditional IRA, you are betting that tax rates will be lower when you withdraw.

Key Takeaways

  • A Traditional IRA deduction reduces your taxable income this year, which lowers your tax bill now if you are in a higher tax bracket.
  • A Roth IRA contribution is made with after-tax money, but all growth and withdrawals are tax-free in retirement.
  • If your income is high enough, you may not be able to deduct a Traditional IRA contribution or contribute to a Roth at all, depending on your filing status and whether you have a workplace retirement plan.
  • If you expect to earn less in retirement than you do now, a Traditional IRA usually saves you more money overall.
  • If you expect to earn the same amount or more in retirement, or if you are young with decades of growth ahead, a Roth usually comes out ahead.

When a Traditional IRA makes the most sense

A Traditional IRA is the right choice if you are in a high tax bracket right now and expect to drop into a lower one in retirement. The deduction directly reduces your taxable income for the year you contribute, which means you pay less federal income tax immediately.

This is most valuable if you are self-employed or have a high W-2 income and want to reduce your adjusted gross income (AGI). A lower AGI can also help you stay under income limits for other tax benefits, such as education credits or the child tax credit.

A Traditional IRA also makes sense if you are close to retirement and want to reduce your taxable income in your peak earning years. If you are 50 or older, you can contribute an extra $1,000 per year (a catch-up contribution), which increases the deduction.

When a Roth IRA makes the most sense

A Roth IRA is the right choice if you are in a lower tax bracket now than you expect to be in retirement, or if you are young and have many years for your money to grow tax-free. Because you pay taxes on the contribution upfront, all future growth and withdrawals are tax-free — no matter how much your account grows.

A Roth is also valuable if you want flexibility in retirement. You can withdraw your contributions (not the earnings) at any time without penalty or taxes. You are not required to take withdrawals at age 73 the way you are with a Traditional IRA, so your money can keep growing if you do not need it.

If you expect tax rates to rise in the future, a Roth locks in today's lower rate. You also have no income limits on Roth conversions, meaning you can move money from a Traditional IRA to a Roth later if your situation changes.

Income limits and whether you can contribute at all

Your ability to deduct a Traditional IRA contribution or contribute to a Roth depends on your income and filing status. If you have a workplace retirement plan (such as a 401(k) or 403(b)), the deduction phases out at higher incomes. If you do not have a workplace plan, you can always deduct a Traditional IRA contribution, regardless of income.

Roth contributions have income limits that are higher than Traditional deduction limits. For 2024, a single filer with a workplace plan can contribute to a Roth if their modified adjusted gross income (MAGI) is below $146,000. The range is wider for married couples filing jointly. These limits change each year.

If your income is too high for a Roth contribution, you have two options: contribute to a Traditional IRA instead, or use a "backdoor Roth" strategy, which involves contributing to a Traditional IRA and then converting it to a Roth. This is legal but requires careful record-keeping, especially if you already have other Traditional IRAs.

Tax brackets and what happens when you withdraw

The real math of Roth versus Traditional comes down to tax rates. If your tax bracket is 24% now and you expect it to be 12% in retirement, a Traditional IRA saves you more money because you avoid the 24% tax now and only pay 12% later. If your bracket is 24% now and you expect it to be 32% later, a Roth saves you more because you pay 24% now instead of 32% later.

The challenge is that you cannot know your future tax bracket with certainty. Tax laws change, your income in retirement may be higher or lower than expected, and you may have other sources of income (Social Security, pensions, investment accounts) that push you into a higher bracket.

One way to hedge this uncertainty is to split your contributions between both types. Contribute some to a Traditional IRA for the immediate tax break, and some to a Roth for tax-free growth. This way, you have money in both tax buckets and can withdraw strategically in retirement based on what your tax situation actually looks like.

Age and how long your money will grow

The younger you are, the more powerful a Roth becomes. If you are 25 and contribute $7,000 to a Roth, that money has 40 years to grow tax-free. Even a modest 7% annual return turns $7,000 into roughly $150,000 by age 65, and you owe zero taxes on that $143,000 in growth.

With a Traditional IRA, you get a tax deduction now, but you pay taxes on all that growth when you withdraw it. If you are young and in a low tax bracket, the Roth deduction is worth less to you anyway, so you are giving up a small tax break now to avoid a much larger one later.

If you are close to retirement (within 10 years), the math shifts. You have less time for growth to compound, so the immediate tax deduction from a Traditional IRA becomes more valuable relative to the future tax savings from a Roth.

What to do if you are still unsure

If you cannot decide, start with a Roth if you are under 50 and in a moderate tax bracket. You lock in today's tax rate, you have decades for growth, and you keep your options open. You can always convert a Traditional IRA to a Roth later if your situation changes.

If you are over 50, have high income, or are within 10 years of retirement, lean toward a Traditional IRA. The immediate tax deduction is more valuable to you, and you have less time for the Roth's tax-free growth to compound.

You can also contribute to both in the same year, as long as your combined contributions do not exceed the annual limit ($7,000 for 2024, or $8,000 if you are 50 or older). This splits your money between tax buckets and gives you flexibility in retirement.

Frequently Asked Questions

Can I change my mind and switch from Traditional to Roth later?

Yes. You can convert a Traditional IRA to a Roth at any time, though you will owe income taxes on the amount you convert. This is called a Roth conversion. Many people do this in years when their income is lower than usual, which keeps the tax bill smaller. You cannot undo a conversion, but you can convert back to Traditional if you change your mind within a certain window.

What if I have both a Traditional and Roth IRA?

You can have both at the same time. Your total contributions across all IRAs cannot exceed the annual limit ($7,000 in 2024), but you can split that money however you want between Traditional and Roth accounts. When you convert a Traditional IRA to a Roth, the IRS treats all your Traditional IRAs as one account for tax purposes, so you cannot avoid taxes by splitting them across multiple institutions.

Do I have to withdraw from my IRA at a certain age?

Yes, but only from a Traditional IRA. You must start taking required minimum distributions (RMDs) from a Traditional IRA at age 73. With a Roth IRA, there are no required withdrawals during your lifetime, so your money can keep growing tax-free as long as you want. This is one major advantage of a Roth if you do not need the money in retirement.

What if my employer offers a 401(k) — should I still contribute to an IRA?

Yes. You can contribute to both a 401(k) and an IRA in the same year. However, if you have a 401(k) at work, the deduction for a Traditional IRA phases out at higher incomes. A Roth IRA has separate income limits, so you may still be able to contribute to a Roth even if you cannot deduct a Traditional IRA. Check your income against the current year's limits.

Which is better for someone who is self-employed?

Self-employed people often benefit from a Traditional IRA because the deduction reduces both federal income tax and self-employment tax. However, self-employed people also have access to a SEP IRA or Solo 401(k), which allow much larger contributions than a regular IRA. Compare all three options based on your income and how much you want to save.