The core difference: when you pay taxes

A traditional IRA lets you deduct contributions from your income taxes now, but you pay taxes on the money when you withdraw it in retirement. A Roth IRA takes the opposite approach: you contribute after-tax dollars (no deduction today), and withdrawals in retirement are tax-free.

That single difference ripples through almost everything else about these accounts. It changes how much you can contribute each year, when you have to start taking money out, who can open one, and what happens to your account if your income rises.

Neither is universally better. The right choice depends on whether you think your tax rate will be higher now or in retirement, how much you earn today, and how long you plan to keep the money invested.

Key Takeaways

  • Traditional IRA contributions may reduce your taxable income this year, but withdrawals in retirement are taxed as ordinary income.
  • Roth IRA contributions are made with after-tax money, so you get no deduction now, but all growth and withdrawals are tax-free in retirement.
  • Income limits restrict who can contribute to a Roth IRA, but there are no income limits for a traditional IRA.
  • Traditional IRAs require you to start withdrawing money at age 73, while Roth IRAs have no withdrawal requirement during your lifetime.
  • You can convert a traditional IRA to a Roth IRA at any income level, though you will owe taxes on the converted amount.

How contributions and tax deductions work

With a traditional IRA, you can deduct your contribution from your taxable income in the year you make it—but only if you meet certain conditions. If you or your spouse have access to a workplace retirement plan (like a 401(k)), the deduction phases out at higher incomes. The income thresholds vary by year and filing status, so you need to check the current limits when you contribute.

With a Roth IRA, there is no deduction. You contribute money you have already paid taxes on. This means your taxable income does not change, and you get no immediate tax benefit. The trade-off is that the money grows tax-free, and you never pay taxes on it again.

For 2024, you can contribute up to $7,000 to either type of IRA if you are under 50, or $8,000 if you are 50 or older. You can split that money between a traditional and Roth IRA in the same year, but your total across both cannot exceed the limit.

Income limits and who can contribute

Traditional IRAs have no income limit. Anyone with earned income can open one and contribute, regardless of how much they make. This makes a traditional IRA the fallback option if your income is too high for a Roth.

Roth IRAs have strict income limits. For 2024, the ability to contribute phases out if your modified adjusted gross income (MAGI) falls within a certain range—the range depends on your filing status. Once your income exceeds the upper limit, you cannot contribute directly to a Roth IRA at all.

If your income is above the Roth limit, you have two options: contribute to a traditional IRA instead, or use a backdoor Roth strategy. A backdoor Roth involves contributing to a traditional IRA and then converting it to a Roth IRA. There is no income limit on conversions, though you will owe taxes on any earnings or deductible contributions in the account at the time of conversion.

Withdrawals and required minimum distributions

With a traditional IRA, withdrawals are taxed as ordinary income. If you withdraw before age 59½, you typically owe a 10% early withdrawal penalty on top of income tax, with some exceptions (first-time home purchase, medical expenses, and a few others). At age 73, you must begin taking required minimum distributions (RMDs) whether you need the money or not, and those withdrawals are fully taxable.

With a Roth IRA, you can withdraw your contributions (the money you put in) at any time, tax-free and penalty-free. Withdrawals of earnings (investment gains) before age 59½ are subject to the 10% penalty and income tax, unless you meet an exception. The major advantage: Roth IRAs have no required minimum distributions during your lifetime. You can leave the money untouched for as long as you want, and your heirs inherit it tax-free.

This difference makes Roth IRAs popular for people who do not need the money in retirement or who want to pass wealth to their children.

Tax implications of conversions

You can convert money from a traditional IRA to a Roth IRA at any time and at any income level. When you convert, you owe income tax on the amount converted in that tax year, as if you had withdrawn it. This is true even if the money came from deductible contributions years ago.

Conversions make sense if you expect your tax rate to be higher in the future, or if you want to lock in a lower tax rate now. They also make sense if you have a traditional IRA with mostly earnings and want to move it to a tax-free account. However, conversions can push you into a higher tax bracket in the year you convert, so timing matters.

If you have both traditional and Roth IRAs and convert part of your traditional IRA, the IRS treats all your traditional IRAs as one pool for tax purposes. This means you cannot convert just the earnings and leave the contributions behind—a strategy called "cherry-picking." The pro-rata rule requires you to calculate taxes based on the total balance across all your traditional IRAs.

Which account makes sense for your situation

Choose a traditional IRA if you want to reduce your taxable income this year, expect to be in a lower tax bracket in retirement, or your income is too high for a Roth. This is especially useful if you are self-employed or have a high income year and want to lower your tax bill immediately.

Choose a Roth IRA if you are early in your career (likely in a lower tax bracket now), expect your income and tax rate to rise, want tax-free growth and withdrawals, or plan to leave money to heirs. Roth accounts are also better if you want maximum flexibility—you can access contributions without penalty, and you have no forced withdrawals.

If you cannot decide, you can hedge by splitting contributions between both types. This gives you a mix of pre-tax and after-tax retirement savings, which provides flexibility when you retire and can help you manage your tax bracket across different years.

Frequently Asked Questions

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

Yes. You can open and contribute to both in the same year, as long as your total contributions across both accounts do not exceed the annual limit ($7,000 or $8,000 if you are 50 or older in 2024). However, income limits may prevent you from contributing to a Roth if your earnings are high.

What happens to my Roth IRA when I die?

Your heirs inherit the account and can withdraw the money tax-free. They must take distributions over a set period (usually 10 years under current rules), but the withdrawals themselves are not taxed. This makes Roth IRAs a powerful wealth-transfer tool.

Can I withdraw my Roth IRA contributions before retirement?

Yes, you can withdraw contributions (the money you put in) at any time without penalty or taxes. You cannot withdraw earnings without penalty until age 59½, unless you meet a specific exception like a first-time home purchase or disability.

What is the pro-rata rule, and why does it matter?

The pro-rata rule means the IRS treats all your traditional IRAs as one account for tax purposes when you convert to a Roth. If you have $80,000 in traditional IRAs and $20,000 in contributions, converting $20,000 means 80% of it is taxable. You cannot convert just the contributions and avoid taxes on the earnings.

Should I convert my traditional IRA to a Roth if I am retired?

It depends on your tax bracket and whether you have cash outside the IRA to pay the conversion taxes. If you are in a low tax year or expect rates to rise, a conversion can make sense. If the conversion pushes you into a much higher bracket, it may not be worth it. A tax professional can model both scenarios for your specific situation.