The core difference: when you pay taxes

A Traditional IRA lets you put money in before you pay taxes on it. You deduct the contribution from your income that year, which lowers your taxable income. When you withdraw the money in retirement, you pay income tax on it then.

A Roth IRA works the opposite way. You contribute money that you have already paid taxes on. The money grows tax-free, and when you withdraw it in retirement, you owe no tax on it—not on the original money or the growth.

The choice between them is really a bet about which tax bracket you will be in. If you think you will earn less in retirement than you do now, a Traditional IRA saves you money today. If you think you will earn more, or want to avoid taxes later, a Roth IRA makes more sense.

Key Takeaways

  • Traditional IRA contributions reduce your taxable income now, but you pay income tax on withdrawals in retirement.
  • Roth IRA contributions use money you have already taxed, but withdrawals in retirement are completely tax-free.
  • Traditional IRAs require you to start taking withdrawals at age 73, while Roth IRAs have no withdrawal requirement during your lifetime.
  • Roth IRAs let you withdraw your original contributions (not earnings) at any time without penalty, while Traditional IRAs charge a 10 percent penalty if you withdraw before age 59½.
  • Income limits apply to Roth IRAs but not Traditional IRAs, so high earners may not be able to contribute directly to a Roth.

How contributions work and what you can put in

Both account types have the same annual contribution limit. For 2024, you can put in up to $7,000 per year if you are under 50, or $8,000 if you are 50 or older. These limits change each year based on inflation.

With a Traditional IRA, you can contribute as long as you have earned income that year, regardless of how much money you make. With a Roth IRA, there are income limits. If your income is above a certain threshold, you cannot contribute directly to a Roth. Those thresholds vary by filing status and change yearly—for 2024, single filers begin to phase out at $146,000 and cannot contribute at all above $161,000.

If you earn too much for a Roth, some people use a workaround called a "backdoor Roth," where they contribute to a Traditional IRA and then convert it to a Roth. This is legal but has tax consequences you should understand before attempting it.

Withdrawals and the rules around taking money out

A Traditional IRA penalizes you if you withdraw money before age 59½. The penalty is 10 percent of the amount withdrawn, plus you owe income tax on it. There are some exceptions—withdrawals for a first home purchase (up to $10,000 lifetime), medical expenses, or disability avoid the penalty, but you still pay income tax.

A Roth IRA is more flexible. You can withdraw your original contributions at any time, tax-free and penalty-free. You cannot withdraw the earnings (the money your contributions made) before age 59½ without a 10 percent penalty, but the ability to access your contributions is a real advantage if you need the money.

Starting at age 73, you must begin taking withdrawals from a Traditional IRA, whether you need the money or not. These are called required minimum distributions, or RMDs. The IRS calculates how much you must withdraw each year based on your age and account balance. Roth IRAs have no such requirement during your lifetime, which makes them useful if you do not need the money and want to leave it to heirs.

Tax implications for your current and future income

The tax advantage of a Traditional IRA happens immediately. If you contribute $7,000 to a Traditional IRA and you are in the 24 percent tax bracket, you save $1,680 in taxes that year. That is money in your pocket now. The tradeoff is that you will owe taxes on the full amount when you withdraw it.

A Roth IRA offers no tax break today, but the long-term benefit can be larger. If your $7,000 grows to $50,000 over 30 years, you owe no tax on that $43,000 gain. With a Traditional IRA, you would owe income tax on the entire $50,000 when you withdraw it.

Which account makes sense depends on your situation. If you are young and expect your income to rise, a Roth locks in today's lower tax rate. If you are near retirement and in a high tax bracket, a Traditional IRA reduces your taxes now. If you are unsure, many people split contributions between both types to hedge their bets.

How inherited IRAs work for your beneficiaries

When you leave a Traditional IRA to someone, they inherit the account but must pay income tax on withdrawals. If you leave a large Traditional IRA to your children, they could face a significant tax bill depending on how quickly they withdraw the money.

A Roth IRA is more attractive to inherit. Your beneficiaries can withdraw the money tax-free, which makes it a powerful tool for passing wealth to the next generation. This is one reason some people prioritize Roth contributions even if they do not get a tax break today.

Spousal IRAs and accounts for people without earned income

If one spouse works and the other does not, the working spouse can open a spousal IRA in the non-working spouse's name. This applies to both Traditional and Roth accounts. The contribution limit is the same—$7,000 for 2024—and the working spouse's income must be at least equal to the total contributions for both spouses combined.

This is useful for couples where one partner stays home or takes time out of the workforce. It lets both people build retirement savings and take advantage of tax-deferred or tax-free growth.

Converting between account types

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 converted in that tax year. Some people do this in years when their income is lower, or when the market has dropped and the account value is smaller, to minimize the tax bill.

Conversions are permanent—you cannot undo them. If you convert $50,000 and the market drops the next month, you still owe tax on the full $50,000. This is why timing matters, and why many people work with a tax professional before converting.

Frequently Asked Questions

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

Yes. Your combined contributions to both accounts cannot exceed the annual limit ($7,000 for 2024 if you are under 50), but you can split that money between them however you want. Many people maintain both to get some tax benefits now and some tax-free growth later.

What happens if I contribute too much to an IRA?

If you over-contribute, you owe a 6 percent excise tax on the excess amount each year until you remove it. You can withdraw the excess and any earnings on it, and you will owe income tax on the earnings portion. It is worth fixing quickly if it happens.

Do I need to report my IRA on my tax return?

You report Traditional IRA contributions on your tax return to claim the deduction. Roth contributions do not get a deduction, so you do not report them. Both types require you to report distributions (withdrawals) on your return.

Which account is better if I am self-employed?

Both Traditional and Roth IRAs work for self-employed people, but you might also consider a SEP IRA or Solo 401(k), which allow much higher contributions. Talk to a tax professional about which makes sense for your income level and business structure.

Can I withdraw from my Roth IRA if I lose my job?

You can withdraw your original contributions anytime without penalty. If you need to withdraw earnings before age 59½, you will owe a 10 percent penalty plus income tax, unless you may have access to for an exception like disability or a first-time home purchase.