Individual Retirement Accounts, or IRAs, can be an important part of your financial strategy when preparing for retirement. While several types of IRAs are available to investors, the most common are Roth IRAs and traditional IRAs.
How do Roth IRAs and traditional IRAs differ, and which one is right for you? Let's walk through both choices, so you can make the best decision for your financial future.
Read more: Take this quiz to find out which investment account is best for your investing style
What is a traditional IRA?
A traditional IRA is an investment account in which your taxes are deferred.
Key features of traditional IRAs
Tax-deductible contributions: The amount of your contributions that can be deducted from your taxes depends on your income, tax filing status and age.
Tax-deferred growth: Once money is in a traditional IRA, you won’t pay taxes on dividends or capital gains until you withdraw the money.
Required Minimum Distributions (RMDs): You must take required minimum distributions at age 73. If you don’t take the RMD, you’ll pay the original taxes owed, plus a 25% excise tax (or 10%, if you correct the error within two years).
Benefits of traditional IRAs
Immediate tax benefits: You’ll receive a perk on your taxes every year when paying into a traditional IRA because your contributions are tax deductible.
Potentially lower taxable income: Contributions to a traditional IRA during your working years reduce your taxable income, and could even move you into a lower tax bracket.
What is a Roth IRA?
With a Roth IRA, your contributions are taxed immediately, and no tax is taken out when money is withdrawn.
Key features of Roth IRAs
Contributions made with after-tax dollars: You pay taxes upfront for a Roth IRA.
Tax-free growth and withdrawals: Like a traditional IRA, your contributions grow tax-free. But with a Roth IRA, you don’t pay taxes when you withdraw the money, as long as you are 59 ½ and have held your Roth IRA for at least five years.
No RMDs during the account holder's lifetime: Withdrawals from Roth IRAs are not required until after the death of the account owner. (Beneficiaries are subject to separate RMD rules.)
Benefits of Roth IRAs
Tax-free income in retirement: Once you’re of retirement age, your income will be totally tax-free, since you already paid taxes on contributions.
No mandatory withdrawals: Roth IRAs offer more flexibility because there are no rules determining when and how much you must withdraw.
Comparing traditional and Roth IRAs
Features | Roth IRA | Traditional IRA |
|---|---|---|
Tax benefits | No tax deduction on contributions. Income earned in the IRA is tax-free. | Tax deductions on contributions. Income earned in the IRA is tax-deferred until you take it out in retirement. |
Contribution limits | For 2025, $7,000 (age 49 and younger) or $8,000 (age 50 and older) | For 2025, $7,000 (age 49 and younger) or $8,000 (age 50 and older) |
Income limits | Income affects your contribution limit | Income does not affect your contribution limit |
Age requirements | Contribute at any age | Contribute at any age |
Distributions | Take your contributions out at any time without paying additional tax or a penalty; you can take earnings out without tax or penalty once you are 59½ or older (if the money has been in the IRA for at least five years) | Distributions taken after age 59½ are taxed at your tax rate at the time of the distribution |
Required minimum distributions | No mandatory withdrawals during your lifetime | Required minimum distributions start at age 73 |
Early withdrawal penalties | Withdrawals of earned income before age 59½ and before the five-year period may be subject to a 10% penalty | Withdrawals made before age 59½ are taxed at your tax rate at the time of the withdrawal and may be subject to a 10% penalty |
Making the right choice for you
Typically, traditional IRAs are recommended when you’re closer to retirement, while Roth IRAs make sense when you’re just starting out. Consider these factors when choosing which retirement account works best for you:
Tax rate: If your current tax rate is higher than your expected tax rate in retirement, you may save more in taxes over time with a traditional IRA. But if you expect your tax rate to increase in retirement, a Roth IRA allows your contributions to grow tax-free.
Retirement timeline and income needs: A traditional IRA might align better with a shorter timeline because you get a tax deduction on your contributions right away, but pay taxes later on your withdrawals. With a Roth IRA, you can benefit from years of tax-free growth if your timeline to retirement is longer.
Estate planning goals: When beneficiaries inherit a traditional IRA, they must pay income taxes on the distributions they take. On the other hand, Roth IRAs can be passed on tax-free to beneficiaries as long as certain requirements are met (like the five-year rule).
Income: If your modified adjusted gross income (MAGI) goes over a certain level, you might not be able to invest in a Roth IRA.
Invest in your future
Once you have an understanding of the differences between a Roth and traditional IRA, consider speaking with a financial advisor to explore which IRA solution aligns best with your long-term financial strategy. Your advisor will help you find the best path toward retirement depending on your situation, life expenses and future goals.
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