Individual Retirement Accounts, or IRAs, can be an important part of your financial strategy when preparing for retirement. The most common types of IRAs are Traditional and Roth.
How do they 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.
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What is a traditional IRA?
A Traditional IRA is an investment account in which your taxes are deferred until withdrawal.
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 the required minimum distributions, or RMD, by April 1of the year after you turn 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With a Roth IRA, your contributions are taxed immediately, and no tax is owed when eligible money is withdrawn.
Key features of Roth IRAs
Contributions made with after-tax dollars: You pay taxes upfront when contributing to a Roth IRA.
Tax-free growth and withdrawals: 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 eligible withdrawals will be tax-free.
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*(see below) | For 2026, $7,500 (age 49 and younger) or $8,600 (age 50 and older) | For 2026, $7,500 (age 49 and younger) or $8,600 (age 50 and older) |
Income limits | Income affects your contribution limit and eligibility | Income does not affect your contribution limit, but does affect extent contributes tax deductible |
Age requirements | Contribute at any age | Contribute at any age |
Distributions | Withdraw your contributions at any time without paying additional tax or a penalty; you can withdraw earnings 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 are due by April 1st of the tax year after you turn 73 |
Early withdrawal penalties | Withdrawals of earned income before age 59½ and before the five-year period may be subject to income taxes plus 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 |
* Note: contribution limits apply to total contributions across all IRAs, both Traditional and Roth.
Making the right choice for you
Factors | Roth IRA | Traditional IRA |
|---|---|---|
Who is the account best suited for? | Individuals who expect to be in a higher tax bracket in retirement | Individuals who expect to be in a lower tax bracket in retirement |
What are the primary tax benefits? | Tax-free withdrawals in the future | Immediate tax benefits on contributions |
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 any potential earnings on 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 could potentially 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 can help you find the path toward retirement depending on your situation, life expenses and future goals.
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