What Each Account Type Does

A Traditional IRA is a retirement savings account where you can deduct contributions from your taxes in the year you make them, lowering your taxable income. The money grows without being taxed each year. When you withdraw it in retirement, you pay income tax on the full amount—both what you put in and all the growth.

A Roth IRA works the opposite way. You contribute money that has already been taxed (no tax deduction now), but the money grows tax-free and you never pay tax on withdrawals in retirement. You get the tax break at the end, not at the beginning.

Both are individual retirement accounts—they belong to you alone, not your employer. Both have annual contribution limits set by the IRS, which change most years. Both require you to wait until age 59½ to withdraw earnings without a penalty, with some exceptions.

Key Takeaways

  • Traditional IRAs let you deduct contributions now and pay taxes later when you withdraw; Roth IRAs take after-tax money now and give you tax-free withdrawals later.
  • Traditional IRAs require you to start taking withdrawals at age 73 (as of 2023); Roth IRAs have no required withdrawals during your lifetime.
  • Roth IRAs let you withdraw your contributions (not earnings) at any time without penalty; Traditional IRAs charge a 10% penalty plus income tax on early withdrawals before 59½.
  • Income limits restrict who can contribute to a Roth IRA, but anyone with earned income can contribute to a Traditional IRA.
  • The choice between them often depends on whether you expect to be in a higher or lower tax bracket in retirement than you are now.

How Taxes Work in Each Account

With a Traditional IRA, the tax benefit happens immediately. If you earn $60,000 and contribute $7,000 to a Traditional IRA, you report only $53,000 as taxable income that year. You save taxes at your current tax rate. But every dollar you withdraw later—whether it's the $7,000 you put in or the $20,000 it grew to—counts as income and gets taxed at whatever your tax rate is then.

With a Roth IRA, there is no tax deduction when you contribute. That $7,000 comes from money you already paid taxes on. In return, when you withdraw that $7,000 plus any growth in retirement, none of it is taxable. This matters most if you expect to be in a higher tax bracket later, or if tax rates rise overall.

The practical difference: a Traditional IRA reduces your taxes today. A Roth IRA reduces your taxes in retirement. Which one saves you more money depends on your tax bracket now versus your tax bracket then—something nobody can predict with certainty.

Contribution Limits and Income Restrictions

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. These limits are the same for both Traditional and Roth. The IRS raises these limits most years to keep pace with inflation.

The catch is that Roth IRAs have income limits—if you earn above a certain amount, you cannot contribute directly. For 2024, the limit phases out between $146,000 and $161,000 for single filers, and between $230,000 and $240,000 for married couples filing jointly. These numbers change yearly. Traditional IRAs have no income limit, but if you or your spouse have a workplace retirement plan, the tax deduction phases out at higher incomes.

If your income is too high for a Roth, some people use a "backdoor Roth" strategy—contributing to a Traditional IRA and then converting it to a Roth—but this has tax complications worth discussing with an accountant.

Required Withdrawals and Access to Your Money

Traditional IRAs require you to start taking withdrawals at age 73 (this changed from 72 in 2023). The IRS calculates a minimum amount based on your age and account balance. You must withdraw it or pay a 25% penalty on the amount you should have withdrawn (reduced to 10% if you correct it within two years). This is called a Required Minimum Distribution, or RMD.

Roth IRAs have no required withdrawals during your lifetime. You can leave the money untouched and pass it to heirs, or withdraw only what you need. This makes Roths useful if you do not need the retirement income or want to leave money to your children.

Both accounts penalize you 10% if you withdraw earnings before age 59½, plus you owe income tax on those earnings. But Roth IRAs let you withdraw your contributions (the money you put in) at any time without penalty or tax. With a Traditional IRA, you cannot separate contributions from earnings—any withdrawal is taxed as income and may trigger the 10% penalty.

Which Account Fits Your Situation

Choose a Traditional IRA if you want to lower 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 common for people with high current earnings who plan to retire early or live on less.

Choose a Roth IRA if you expect to be in a higher tax bracket later, want tax-free withdrawals in retirement, prefer not to take required withdrawals, or want the flexibility to access your contributions early. Roths are often better for younger workers who have decades for tax-free growth and likely have lower income now than they will later.

Some people split the difference and contribute to both in the same year, as long as the total does not exceed the annual limit. You might use a Traditional IRA for the immediate tax break and a Roth for tax-free growth, depending on your situation.

How to Open and Fund an Account

You can open either type of IRA at a bank, credit union, brokerage firm, or investment company. The process is straightforward: fill out an application (usually online), provide your Social Security number and basic information, and choose how to fund it. You can transfer money from a checking or savings account, or if you are switching from another IRA, you can do a direct transfer that does not count against your annual contribution limit.

Once the account is open, you decide what to invest the money in. Some IRAs are held at banks as savings accounts earning interest. Most are held at brokerages where you choose stocks, bonds, mutual funds, or exchange-traded funds. The account itself is just a container—the tax treatment (Traditional or Roth) is separate from what you invest in.

You can contribute to an IRA as long as you have earned income from a job or self-employment. If you are married and one spouse does not work, the working spouse can open a Spousal IRA for the non-working spouse and contribute on their behalf.

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 year. This is called a Roth conversion. People do this when they expect tax rates to rise, or when they have a low-income year and can convert at a lower tax cost.

You cannot convert a Roth back to a Traditional IRA. Once money is in a Roth, it stays there or comes out as a withdrawal.

If you have both types of accounts, withdrawals are treated proportionally for tax purposes. If you have $50,000 in Traditional IRAs and $50,000 in Roth IRAs, and you withdraw $10,000 from a Roth, the IRS treats it as if half came from pre-tax money and half from after-tax money, even if you withdrew only from the Roth account. This is called the "pro-rata rule" and can complicate conversions.

Frequently Asked Questions

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

Yes. Your total contributions to both accounts combined cannot exceed the annual limit ($7,000 for 2024 if you are under 50), but you can split that between them however you want. Many people maintain both for flexibility.

What happens to my IRA if I die?

Your IRA passes to whoever you named as beneficiary on the account. They can inherit it as-is, withdraw it all at once, or take distributions over time. The tax treatment depends on the account type and the beneficiary's relationship to you. Roth IRAs are often better for leaving to heirs because withdrawals are tax-free.

Can I withdraw money from my IRA before retirement?

You can withdraw from a Roth IRA anytime without penalty or tax—but only the contributions you put in, not the earnings. Traditional IRAs charge a 10% penalty plus income tax on any withdrawal before 59½, with narrow exceptions like disability, medical expenses, or first-time home purchase (up to $10,000 lifetime).

Do I have to invest my IRA in stocks?

No. You can hold your IRA as a savings account earning interest, in bonds, mutual funds, ETFs, or individual stocks. Some IRAs at banks are just high-yield savings accounts. The account type (Traditional or Roth) is separate from what you invest in.

What if I have a 401(k) at work—do I still need an IRA?

You can have both. Many people do. An IRA gives you more control over investments and lower fees than some workplace plans. If your employer matches 401(k) contributions, contribute enough to get the full match first, then max out an IRA if you can.