Roth IRA vs. traditional IRA
- 4 min read
What we'll cover
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Roth IRAs and traditional IRAs
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The pros & cons of both accounts
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How to choose the best one for you
While there are several types of IRAs, the most common are Roth IRAs and traditional IRAs .
Let's walk through the differences, as well as the perks and downsides of Roth IRAs and traditional IRAs, so you can make a decision for your financial future.
Differences between Roth and traditional IRA
The major difference between the two types of accounts is when your contributions and earnings are taxed.
Compare and contrast traditional IRAs and Roth IRAs using this chart.
Roth and Traditional IRA Comparison Table
| Roth IRA | Traditional IRA | |
|---|---|---|
| Tax benefits | No tax deduction on contributions. Interest earned in the IRA is tax-free. | Tax deductions on contributions. Interest earned in the IRA is tax-deferred until you take it out in retirement. |
| Contribution limits | For 2023, $6,500 age 49 and younger; $7,500 age 50 or older (for 2024, $6,500 and $7,500, respectively) | For 2023, $6,500 age 49 and younger; $7,500 age 50 or older (for 2024, $6,500 and $7,500, respectively) |
| 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 | If your birth year is 1951-1959, the RMD age is 73. If your birth year is 1960 or later, the RMD age is 75. |
| Early withdrawal penalties | Withdrawals of earned interest before age 59½ 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 |
Can you contribute to both Roth and traditional IRA?
If you meet eligibility requirements, you can contribute to both a Roth and a traditional IRA at the same time as long as you don’t exceed the combined annual contribution limit of $6,500 in 2023 ($7,500 if you’re age 50 or older). For 2024, the contribution limit goes up to $7,000 ($8,000 if you're age 50 or older).
The contribution deadline for both Roth and traditional IRAs for a given year is typically the tax filing deadline the following year.
Which is better for you — a Roth IRA or a traditional IRA?
If you’re trying to decide between the two, consider where you are in your career.
A Roth IRA could make sense for you if you’re just starting out. Since you pay taxes up front, you don’t pay taxes on your withdrawals in retirement and you can benefit from years of tax-free growth, since the earnings in a Roth IRA are tax-free. If your income exceeds government-set limits for a Roth IRA, a backdoor Roth IRA strategy allows you to convert or rollover funds from a traditional IRA into a Roth IRA.
On the other hand, a traditional IRA could make sense if you are closer to retirement or if you expect your income to be significantly reduced when you stop working. That’s because you get a tax deduction on your contributions right away but pay taxes later on your withdrawals.
Pros and cons of traditional and Roth IRAs
Let's walk through the benefits and downsides of traditional and Roth IRAs:
Pros of Traditional and Roth IRAs
Traditional and Roth IRAs each offer the following benefits:
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Tax-free growth: Once money is in a traditional IRA, you won’t pay taxes on dividends or capital gains until you withdraw the money. You pay pre-tax for a Roth IRA, which means you don’t pay taxes at all when you withdraw the money.
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Other tax benefits: You can deduct traditional IRA contributions, determined based on income and your tax filing status.
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Exceptions to pulling out money early: Again, you might have to pay a 10% penalty in addition to ordinary income taxes except for when making a first-time home purchase, for birth or adoption expenses, for qualified education expenses, disability or death, medical expenses, health insurance, receiving funds on a regular distribution schedule and for National Guard and reservists if on active duty.
Cons of Traditional and Roth IRAs
The downsides of a traditional and Roth IRA include the following:
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Contribution limits: You’ll have to abide by strict contribution limits with both Roth and traditional IRAs. Your maximum contribution limit is $6,500 in 2023, with a $7,500 limit if you’re age 50 or older.
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Income limits: If your modified adjusted gross income (MAGI) goes over a certain level, you might not be able to invest in a Roth IRA
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Penalties: You’ll face a 10% penalty on top of the taxes owed for any withdrawals before age 59½ with a traditional IRA. On the other hand, you can withdraw a sum equal to your contributions penalty and tax-free at any time with a Roth IRA (though you will save yourself from the 10% penalty if you’ve held the account for five years and have reached age 59 ½).
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RMDs: You must take required minimum distributions at age 73 with a traditional IRA. If you don’t take the RMD, you’ll pay the original taxes owed, plus a 25% excise tax as a penalty. The 25% excise tax can be reduced to 10% if you correct the failure in a timely manner.
Once you have a basic understanding of the difference between a Roth and traditional IRA, it’s a good idea to visit the Internal Revenue Service website for specific, up-to-date information. In addition, a tax professional can help you get the right mix of retirement savings products for your situation and life expenses and help you decide between a traditional or Roth IRA.
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