Roth IRA vs. traditional IRA: Which should you choose?
So you’ve decided you want to open an individual retirement account (IRA). The question is, should you go with a Roth or a traditional IRA? Both are tax-advantaged retirement savings accounts, but they differ in a few key ways, including eligibility and the way contributions and withdrawals are taxed.
Contributions to a traditional IRA are tax deductible, and they also grow tax deferred. However, you’ll be taxed when you take the money out, ideally in retirement.
Key Points
- Roth and traditional IRAs are both tax-advantaged retirement accounts, but the similarities end there.
- Contributions and withdrawals are taxed differently, so your decision may depend on whether you want to pay taxes now or later.
- Other considerations include marital status, whether you’re participating in a retirement plan at work, and your income.
With a Roth IRA, your contributions are made after tax, but then your money grows tax free. Qualified withdrawals also come out tax free.
To be eligible to contribute to an IRA, you must have earned income—meaning money you’ve worked for, such as from a job or self-employment. Your income impacts how much you can put away in a Roth IRA (more on this below).
Before we explore the details of each type, here’s a table that offers a quick comparison overview.
The annual contribution limit is the same for both Roth and Traditional IRAs. For the 2024 tax year, it’s $7,000 (or your earned income, whichever is lower) if you’re under age 50. If you’re age 50 or over, you’re allowed an additional $1,000 “catch-up contribution,” or $8,000 total.
| Roth IRA | Traditional IRA |
| You can make after-tax contributions. | You can make pretax contributions. |
| No up-front tax advantages. | Making pretax contributions has immediate tax benefits—it lowers your current income. |
| Earnings and qualified withdrawals are tax free. | Earnings and withdrawals are generally taxed. |
| 2024 annual contribution limit: $7,000 (or your earned income, whichever is lower) if you’re under age 50; $8,000 if you’re age 50 or over. | 2024 annual contribution limit: $7,000 (or your earned income, whichever is lower) if you’re under age 50; $8,000 if you’re age 50 or over. |
| You (and your spouse, if filing jointly) must have earned income below a certain level. | You can contribute if you have earned income, but specific income thresholds if you also have an employer plan such as a 401(k). |
| Penalties apply for withdrawals made before age 59 1/2, except under certain circumstances, such as first-time home purchase, or birth or adoption of a child. | Penalties apply for withdrawals made before age 59 1/2, or minimum distributions not taken by April 1 of the year following the year you reach age 72. |
| You can make contributions on behalf of a nonworking spouse. | You can make contributions on behalf of a nonworking spouse. |
| No maximum age limit to contribute. | No maximum age limit to contribute. |
| No minimum distributions required (for original IRA owners). | Minimum distributions are required by April 1 of the year following the year you reach age 72. |
Understanding your eligibility
Do you or your spouse have taxable income you’ve earned as an employee or self-employed individual? Good news: You can contribute to an IRA.
Traditional IRA eligibility. If you don’t have a 401(k) or similar retirement account through your job, you can contribute to a traditional IRA regardless of your income.
On the other hand, if you’re currently saving in a 401(k) or similar plan at work, your IRA contribution deduction will be phased out if your 2024 adjusted gross income (AGI) is between $77,000 and $87,000 as a single filer or between $123,000 and $143,000 if you’re married and filing jointly. If you’re married and only you or your spouse is contributing to a 401(k) plan, the IRA tax deduction is phased out if you earn between $230,000 to $240,000 as a couple.
Roth IRA eligibility. You can contribute to a Roth IRA if you have taxable compensation and your modified AGI is less than $161,000 for single filers or $240,000 for those married and filing jointly. If your 2024 AGI is between $146,000 and $161,000 as a single filer or between $230,000 and $240,000 as married filing jointly, your contribution limit will be reduced.
Roth vs. traditional IRA: Which should you choose?
Both IRAs are great options to help you save for your future. Choosing between them often comes down to one question: Do you want to pay taxes now or later? If you think you’ll be in a lower tax bracket when you retire, then you might consider contributing to a traditional IRA during your peak earning years, then taking a smaller tax hit (in theory, anyway) when you withdraw the money in retirement.
That said, it’s nearly impossible to accurately predict what tax bracket you’ll be in several decades from now. With a Roth IRA, you’ll pay taxes now, but when you withdraw those funds in retirement, you won’t pay federal taxes on the amount you invested or on the appreciation.
Although “tax-free withdrawal” sounds great, remember that with a Roth you’re taxed up front, so your initial pool of funds is smaller than it would be in a traditional, pretax IRA. For instance, if you’re in the 20% tax bracket, you’re actually investing just 80 cents of every dollar you contribute to a Roth IRA. The money grows tax-free, of course, but that initial tax bite is the trade-off between contributing to a Roth versus a traditional IRA.
Other important considerations
Here are some other things to keep in mind when weighing a Roth versus traditional IRA:
- Your age. The earlier you are in your career, the more compelling it may be for you to contribute to a Roth IRA. Because retirement is still many years in the future, you may benefit more from the tax-free growth and compounding a Roth IRA offers.
- Your potential life span. Many people today are living and working longer. If you envision a retirement that could last well into your 80s or 90s, the flexibility and tax-free benefits of a Roth IRA may make it an appealing option.
- You can choose both. You can mix and match your contributions to a Roth and a traditional IRA—as long as you stay within the government’s guidelines. Both types of tax-advantaged retirement accounts provide great tax perks and savings opportunities for your future.
The bottom line
As you compare a Roth versus traditional IRA, it’s also important to consider factors like making sure your portfolio is diversified, and that you’re investing in line with your ability to handle risk and your timeline until retirement.
And remember: This isn’t a critical decision with potentially dire financial consequences should you choose the wrong one. It’s simply a way to optimize your retirement savings plan for your personal situation. Either way, you’re making a commitment. You’re building a solid foundation for a financially secure retirement.