The core difference: when you pay taxes

A Traditional IRA lets you put money in before you pay income tax on it. You deduct the contribution from your taxable income in the year you make it, which lowers your tax bill that year. Then when you withdraw the money in retirement, you pay income tax on whatever you take out.

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

That single difference shapes almost everything else about how these accounts work. Which one makes sense for you depends on whether you expect to be in a higher or lower tax bracket now versus in retirement.

Key Takeaways

  • Traditional IRA contributions reduce your taxable income now, but withdrawals in retirement are taxed as ordinary income.
  • Roth IRA contributions are made with after-tax dollars, but may have access to 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.
  • Income limits apply to Roth IRA contributions if you earn above a certain threshold, but Traditional IRA contributions have no income limit.
  • You can withdraw your Roth contributions (not earnings) at any time without penalty, while Traditional IRA early withdrawals are generally taxed and penalized.

How contributions work and what they cost you now

With a Traditional IRA, your contribution amount reduces your taxable income for that year. If you earn $60,000 and contribute $7,000 to a Traditional IRA, you only report $53,000 as taxable income. This means you pay less in federal income tax that year. The tax savings depend on your tax bracket—someone in the 22% bracket saves about $1,540 on a $7,000 contribution, while someone in the 12% bracket saves about $840.

With a Roth IRA, you get no tax deduction. You contribute money you have already paid taxes on. If you earn $60,000 and contribute $7,000 to a Roth, you still report $60,000 as taxable income and pay tax on all of it. You get no immediate tax break.

There is a catch with Roth contributions: if your income is above a certain threshold, you cannot contribute to a Roth IRA at all. The income limits change each year and depend on your filing status. For 2024, single filers begin to lose the ability to contribute once their income exceeds $146,000, and the ability phases out completely at $161,000. Married couples filing jointly have higher limits. Traditional IRAs have no income limit—anyone can contribute, regardless of how much they earn.

How withdrawals work in retirement

With a Traditional IRA, every dollar you withdraw in retirement is taxed as ordinary income. If you withdraw $40,000 in a year when you are in the 22% tax bracket, you owe about $8,800 in federal income tax on that withdrawal. The money you withdraw also counts toward your total income for the year, which can affect other things—like whether you have to pay taxes on Social Security benefits or whether you may have access to for certain deductions.

With a Roth IRA, may have access to withdrawals are completely tax-free. If you have had the account for at least five years and you are at least 59½ years old, you can withdraw as much as you want and owe no federal income tax. Your withdrawals do not count as income, so they do not affect Social Security taxation or other income-based calculations.

The five-year rule matters. Even if you are 59½, your first Roth withdrawal is only tax-free if you opened the account at least five years earlier. If you opened a Roth at age 58 and withdrew money at 59½, that withdrawal would be taxed because the five-year clock had not finished.

Required withdrawals and account control

A Traditional IRA forces you to start withdrawing money at age 73. 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. If you do not take the full amount, you owe a penalty of 25% on the amount you should have withdrawn (this penalty was reduced from 50% in 2023). You must take these withdrawals whether you need the money or not, and each withdrawal is taxed as income.

A Roth IRA has no required minimum distributions while you are alive. You can leave the money in the account to grow as long as you want. This makes a Roth useful if you do not need the money in retirement and want to pass it to heirs, or if you want to control exactly when and how much you withdraw.

Early withdrawal rules and penalties

If you withdraw money from a Traditional IRA before age 59½, you owe income tax on the withdrawal plus a 10% early withdrawal penalty. There are some exceptions—you can withdraw without penalty if you are disabled, if you use the money for a first-time home purchase (up to $10,000 lifetime), or if you are taking substantially equal periodic payments. But in most cases, early withdrawal is expensive.

A Roth IRA is more flexible. You can withdraw your contributions (the money you put in) at any time, for any reason, with no tax or penalty. You cannot withdraw the earnings (the growth) before age 59½ without penalty, but the ability to access your contributions makes a Roth useful as an emergency fund. Some people use a Roth partly as savings and partly as retirement investment for this reason.

Income limits and who can use each account

Anyone with earned income can open and contribute to a Traditional IRA. There is no income limit. If you earn $200,000 a year, you can still contribute. However, if you are covered by a workplace retirement plan like a 401(k), the tax deduction for your Traditional IRA contribution phases out above certain income levels. For 2024, single filers covered by a workplace plan begin to lose the deduction at $77,000 and lose it completely at $87,000. Married couples have higher thresholds. If you are not covered by a workplace plan, you can deduct the full contribution no matter your income.

Roth IRAs have strict income limits on who can contribute. For 2024, single filers can contribute the full amount if they earn less than $146,000. The ability to contribute phases out between $146,000 and $161,000. Married couples filing jointly can contribute the full amount if they earn less than $230,000, phasing out between $230,000 and $240,000. If you earn above these limits, you cannot contribute to a Roth directly, though you may be able to use a "backdoor Roth" strategy (converting a Traditional IRA to a Roth).

Which one makes sense for your situation

Choose a Traditional IRA if you want to lower your taxable income now and expect to be in a lower tax bracket in retirement. This often makes sense if you are in a high tax bracket while working, or if you expect your retirement income to be much lower than your working income. The immediate tax deduction helps you now, and paying taxes on withdrawals later might cost you less overall.

Choose a Roth IRA if you expect to be in the same or higher tax bracket in retirement, or if you simply want the certainty of knowing your withdrawals will be tax-free. A Roth also makes sense if you want flexibility—the ability to withdraw contributions early, no required withdrawals, and the option to pass tax-assistance programs to heirs. If you are young and expect your income to grow, a Roth often wins because you pay tax at today's lower rate and avoid tax on decades of growth.

You do not have to choose one forever. You can have both a Traditional and a Roth IRA at the same time, though your total contributions across both accounts cannot exceed the annual limit (currently $7,000 for people under 50, or $8,000 if you are 50 or older).

Frequently Asked Questions

Can I convert a Traditional IRA to a Roth?

Yes. You can convert all or part of a Traditional IRA to a Roth at any time. You will owe income tax on the amount you convert in that year, but once it is in the Roth, it grows tax-free. This is useful if you expect tax rates to rise, or if you want to lock in a lower tax bracket in a particular year.

What happens to my IRA when I die?

Your heirs inherit the account. With a Traditional IRA, they must withdraw the money within ten years and will owe income tax on withdrawals. With a Roth IRA, they can withdraw tax-free, which is one reason a Roth is valuable for leaving money to family. The rules changed in 2023, so check the current rules if this matters to your planning.

Can I have both a Traditional and Roth IRA?

Yes, but your total contributions to both accounts in a single year cannot exceed the annual limit. If you contribute $4,000 to a Traditional IRA, you can only contribute $3,000 to a Roth that year (assuming the limit is $7,000). You can split your money however you want between the two, as long as the total does not exceed the limit.

What if my employer offers a 401(k)—do I still need an IRA?

An IRA and a 401(k) are separate accounts with separate contribution limits. You can have both. Many people use a 401(k) at work and an IRA for additional savings. A Roth IRA is especially useful alongside a 401(k) because it gives you tax-free retirement income to balance the taxable withdrawals from your 401(k).

Do I have to report my IRA on my taxes?

You report Traditional IRA contributions on your tax return to claim the deduction. Roth contributions do not need to be reported if you are just contributing, but you do report conversions. If you take a distribution, it appears on a form your bank sends to the IRS, and you report it on your return. Required minimum distributions from a Traditional IRA must also be reported.