Roth IRA vs. Traditional IRA: Which Is Right for You?

A football team wouldn’t head into a championship game—or even make it there—without a solid game plan, right? Of course not! No one wins the Super Bowl by accident. And the same is true for your money goals. An IRA will likely be an important part of your retirement game plan. But first, you need to know how an IRA works and which type—traditional or Roth—will be the best choice for you.

An IRA (Individual Retirement Account) is a retirement savings account that provides tax advantages (more on that later) for your retirement savings. An IRA isn’t an investment—it’s an account that holds your investments and protects them from taxes.

Here are some of the top reasons why you should open an IRA:

• If you have money in a retirement plan with a former employer—like a 401(k)—you can roll that money into an IRA so you have more control over your investment options. 
• IRAs are a great option for saving for retirement if you don’t have access to a workplace retirement plan.
• If you need a tax-free investing account to go along with your tax-deferred 401(k) plan (more about tax-free vs. tax-deferred below), a Roth IRA fits the bill.
• An IRA works great alongside your workplace plan as an additional tax-advantaged account that allows you to save even more for retirement.

So it’s clear an IRA is a good thing for your retirement savings plan. Now, let’s check out the similarities and differences between Roth IRAs and traditional IRAs to see which one is most likely to work out for a retirement win for you.

Roth IRA vs. Traditional IRA: What Do They Have in Common?

Choosing the right IRA is important because it can save you thousands in taxes when you retire. But before we talk about the differences between a traditional and Roth IRA, let’s take a step back and see what they have in common:

• You and your spouse can each have an IRA, as long as one of you has an earned income and you file a joint tax return.
• You can contribute up to $7,000 ($8,000 if you’re age 50 or older by the end of the year), or an amount equal to your income for the year if it was less than the contribution limit.¹
• You’ll have to pay taxes and an additional 10% penalty on withdrawals made before you turn 59 1/2 (aka early withdrawals).²
• You can contribute to an IRA any time during the year or before you file your tax return the following year.

Roth IRA vs. Traditional IRA: How Are They Different?

Okay, folks. There are some serious differences when it comes to traditional and Roth IRAs, and those differences can have a major impact on how much taxes you pay now and in retirement.   

Let’s start with the limits, rules and regulations for traditional and Roth IRAs. Here’s a quick side-by-side comparison before we jump into the details:

	Traditional IRA	Roth IRA
Taxes on Contributions	In most cases, contributions are tax deductible.	Contributions are not tax deductible.
Eligibility and Income Limits	There are no annual income limits on contributions.	In 2024, you can contribute up to the limit if your income is less than $146,000 for single filers and $230,000 for married couples filing jointly.
Contribution Limits	For 2024, $7,000 ($8,000 if you’re age 50 or older by the end of the year)	For 2024, $7,000 ($8,000 if you’re age 50 or older by the end of the year)
Distributions and Withdrawal Rules	You must make annual withdrawals from your IRA after you turn 73.	No withdrawals required if you are the original owner.
Taxes on Retirement Withdrawals	You must pay taxes on withdrawals in retirement.	You are not taxed on qualified withdrawals in retirement.3

Alright, let’s dive into these key differences between traditional and Roth IRAs and see which will give you more bang for your retirement buck:

Tax-Deferred vs. Tax-Free

The biggest difference between a Roth IRA and a traditional IRA is how they’re taxed. And trust us—how Uncle Sam takes his slice of your investing pie can make a huge difference on your retirement savings:

• With a Roth IRA, you make after-tax contributions. In other words, you’ve already paid taxes on the money you put in. Sweet! Now you can watch your money grow tax-free, and when you retire, you won’t have to pay taxes on your withdrawals.
• With a traditional IRA, your contributions could be tax deductible. That means you can deduct contributions on your annual tax return, which lowers your taxable income. The amount of the deduction depends on your filing status, income, and whether you have access to a workplace plan like a 401(k).

But here’s the thing with traditional IRAs—since you’re not paying taxes on your contributions this year, you’ll have to pay taxes on that money and its growth when you take the money out in retirement (that’s why it’s called tax-deferred growth). And who knows what the tax rate will be when you retire?

Eligibility and Income Limits

Traditional IRAs have no annual income limits—anyone with an income can open and contribute to a traditional IRA. And in 2024, you can contribute to a Roth IRA up to the limit if your income is less than $146,000 for single filers and $230,000 for married couples filing jointly.⁴

Distribution and Withdrawal Rules

While taxes are the number one difference between traditional and Roth IRAs, the rules for distributions and withdrawals come in a close second.

How much will you need for retirement? Find out with this free tool!

A distribution is when you take money out of your IRA penalty-free. It doesn’t trigger the 10% penalty because you’re either 59 1/2 or older, or you’re rolling over the money from one qualified plan to another, like a 401(k) to an IRA. Here are the rules for distributions and withdrawals for traditional and Roth IRAs:

• Traditional IRAs: You’ll have to start taking annual withdrawals, called required minimum distributions (RMDs), when you turn 73.⁵ That’s because you still owe Uncle Sam taxes on those contributions and their growth—and he wants his cut.
• Roth IRAs: You’ve already paid taxes on your money, so you can leave it in your account to keep growing as long as you want. No RMDs!

As we mentioned before, for both traditional and Roth IRAs, you’ll have to pay income taxes and an additional 10% penalty on early withdrawals (made before you turn 59 1/2).⁶ Don’t be tempted to take an early withdrawal from your IRA for any reason (other than to avoid bankruptcy or foreclosure)! Your future self will thank you for keeping your money in your IRA over the years so it can grow into a legit retirement nest egg.

Taxes on Withdrawals

When you withdraw money from your traditional IRA after you turn 59 1/2, you’ll pay taxes on that money at your current tax rate. With Roth IRAs, your withdrawals are completely tax-free.

That’s worth repeating: Your Roth distribution is not taxed. That’s an insanely great deal that will save you big time on the taxes you’ll pay in retirement. And that means your retirement savings will last longer! (We’re big fans of Roth retirement accounts—can you tell?) If you qualify for a Roth IRA get one for yourself and your spouse!

Roth or Traditional?

Okay, now you know what each of these retirement accounts brings to the table. Both traditional and Roth IRAs are good options for your retirement investing, but at the end of the day, the Roth IRA simply can’t be beat when it comes to building wealth and saving for your retirement dreams. Tax-free growth and tax-free withdrawals in retirement are perks of a Roth IRA worth the sting of a heftier tax bill this year.

Here’s what we recommend: Once you’re debt-free and have a fully funded emergency fund, start investing 15% of your income for retirement.

• Start with your 401(k) or workplace retirement plan and invest up to the match. (If your plan doesn’t match, start investing in your Roth IRA first.)
• Next, open a Roth IRA and max it out (or invest up to your 15% goal, whichever comes first).
• If you max out your Roth IRA and haven’t reached your 15% yet, go back to your 401(k) and bump up your contributions until you reach your 15% goal.

Side note: If you have a Roth 401(k) option at work and you have good growth stock mutual funds to choose from, you can invest your entire 15% there.

If you don’t qualify to contribute to a Roth IRA because your income is too high and you don’t have a Roth 401(k) option at work, you still have options to take advantage of the Roth IRA’s tax-free growth and withdrawals. You can roll over a traditional IRA or retirement funds from an old 401(k) with a Roth conversion. If that sounds like a lot of hoops to jump through, we’ll say this again, so you know it’s worth the hassle—tax-free growth and withdrawals!

Talk With an Investing Pro

When it comes to finding the right retirement investing choices for your situation, we always recommend getting with an investing professional. A SmartVestor Pro can help you understand your options and figure out what works for your specific circumstances. Remember, a dream without a plan is just a wish!