Roth vs. Traditional IRA: Key Differences & How to Choose

Opening an individual retirement account (IRA) can be a great way to save on taxes while investing in your future and setting yourself up for a successful retirement. IRAs are the second most popular type of retirement account in the U.S., behind employer-sponsored retirement accounts, such as the 401(k) and 403(b).

Every year, the IRS releases its contribution limits for IRAs. In 2024, the maximum amount you can contribute to all of your traditional IRAs and Roth IRAs combined is $7,000. You can contribute up to a total of $8,000, including $1,000 in catch-up contributions, if you are age 50 or older. For 2025, both amounts stay the same.

Additionally, your contributions cannot exceed your taxable compensation for the year, if it is less than these limits. However, if you’re married filing jointly, you can use your spouse’s taxable compensation to meet this requirement and contribute to an IRA for yourself even if you have no earnings of your own.

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Traditional IRAs

You can contribute to a traditional IRA if you—or your spouse, if you are married filing jointly—have taxable compensation. Traditional IRAs allow you to save on taxes in the present by deducting your contributions in the year in which you make them, with certain limitations for those who have (or whose spouse has) a retirement plan at work. You will, however, owe taxes on your withdrawals in the future. If you wish to avoid the additional 10% early withdrawal penalty, you will either have to wait until you are 59½ or meet any one of the following criteria for a penalty-free exception.

• Qualified higher education expenses (QHEE) can be withdrawn penalty-free, as long as the withdrawal is equal to or less than the QHEE.
• Qualified first home expenses (up to $10,000) can be withdrawn penalty-free.
• Unreimbursed medical expenses (to the extent the expenses exceed the adjusted gross income deduction threshold for the given year) can be withdrawn penalty-free.
• Health insurance premiums paid while you’re unemployed can be withdrawn penalty-free.
• Upon your total and permanent disability, you can withdraw earnings penalty-free.
• Upon your death, earnings can be withdrawn penalty-free by your beneficiary.

Because you owe taxes only when you make withdrawals from your traditional IRA, the IRS has set rules for required minimum distributions (RMDs) that you must take when you reach a certain age. If you have not already, you should start making withdrawals when you reach age 72 (or age 73, if your 72nd birthday was after Dec. 31, 2022). The first year following your 72nd birthday, you will have two required distribution dates: April 1 and December 31. You can alternatively take the first distribution before December 31 of the year you turn 72 to keep the two RMDs in separate tax years. In subsequent years, the distribution date is December 31. (In 2033, the RMD age will rise to 75.)

Roth IRAs

Contributions to a Roth IRA are not tax-deductible. Instead, your qualified distributions in retirement will be tax-free as long as you meet all the requirements for a Roth IRA. Another benefit to the Roth IRA is your ability to withdraw your contributions at any point, without being subject to tax or an early withdrawal penalty. Note: That is only for contributions you have previously made to the Roth IRA, not earnings.

Earnings cannot be withdrawn tax-free from a Roth IRA until you have passed five years from your first contribution. At that point, earnings can only be withdrawn without the 10% early withdrawal penalty if you have reached the age of 59½ or have met any one of the criteria for penalty-free exceptions listed above.

You can contribute to a Roth IRA if you—or your spouse, if you are married filing jointly—have taxable compensation. However, Roth IRAs have additional income-based contribution limits that put further restrictions on the contribution limits for all IRAs. Based on your filing status, you can find your Roth IRA contribution limits for 2024 and 2025 according to your modified adjusted gross income (MAGI) in the following chart.

Roth IRAs do not have required minimum distributions if you are the original owner of the IRA. However, after your death, your beneficiary will be required to take RMDs. The rules for beneficiaries are complicated; a good tax advisor can be helpful.

Key differences

Traditional IRAs and Roth IRAs mainly differ in the timing of their tax benefits. Traditional IRAs provide a tax benefit in the present, while Roth IRAs provide a tax benefit in your retirement years. Here is a chart that compares the features of a traditional IRA with those of a Roth IRA.

Similarities

Both the traditional IRA and Roth IRA allow you to save for retirement in a tax-advantaged way. Both types of IRAs have the same maximum contribution limit of $7,000 in 2024 and 2025 ($8,000 for those age 50 and over). However, the Roth IRA may be limited even further based on your MAGI. Both have potential early withdrawal penalties of 10% if you withdraw funds improperly before the age of 59½. For Roth IRAs, this is only an issue for withdrawals that are not considered qualified distributions.

Why a Roth IRA works for many savers

The Roth IRA provides the freedom of tax-free withdrawals in retirement. If you prefer to have the luxury of keeping all the money you withdraw from your retirement account while you’re enjoying your retirement, a Roth IRA may be best for you. It also means that all the earnings on the contributions you made over the years will also come to you tax-free.

Why a traditional IRA works for many savers

The traditional IRA provides the benefit of a tax deduction in the year in which you make a contribution. It allows you to lower your taxable income by contributing a portion of your income into your retirement account. The time value of money states that the same amount of money in the present is worth more than the theoretical same amount of money in the future.

If you place a high importance on the time value of money, you may prefer a traditional IRA. Of course, there are other factors to consider that may affect your decision to pay taxes now or in retirement, including the impact of inflation, potential tax rate changes between now and your retirement, and your current and future potential income at the age when you are taking RMDs.

Special considerations for Roth and traditional IRAs

Some high-income taxpayers do not qualify to contribute directly to a Roth IRA due to the income-based contribution limits. A backdoor Roth IRA is a tax strategy in which high-income taxpayers are able to access the benefits of a Roth IRA even though they exceed the income limits. With a backdoor Roth IRA, a high-income taxpayer who has a traditional IRA may convert the funds to a Roth IRA.

The transfer cannot be done tax-free. Because the traditional IRA had the benefit of tax-deductible contributions, you will have to include the amounts in income that you would have otherwise reported if you had simply withdrawn the funds from your traditional IRA without a conversion. However, if you make the transfer from your traditional IRA to a Roth IRA within the allowable 60-day time period, you will forfeit the 10% early withdrawal penalty on the conversion contribution.

TIME Stamp: A traditional IRA yields a tax break in the present; a Roth IRA provides a tax break at retirement

Opening an IRA is a wise retirement investment decision. If you’ve decided to open your own traditional IRA or Roth IRA, you can invest with confidence online while managing your own IRA with investment tools such as Empower.

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$100,000

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Accounts offered

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Frequently asked questions (FAQs)

What are the disadvantages of a Roth IRA?

Depending on your personal financial situation, there are several downsides to a Roth IRA.

• If you are over the modified adjusted gross income (MAGI) limit, you cannot directly contribute to a Roth IRA.
• Even if you meet the income limits, a Roth has a phase-out MAGI range and a low maximum annual contribution.
• You do not receive a tax break in the present when you make your contributions.

Is it better to invest in a 401(k) or a Roth IRA?

It’s wise to have both. To understand why, here’s a look at how a 401(k) works.

A 401(k) is an employer-sponsored retirement account that allows employees to contribute a portion of their earnings directly to their retirement account. Employers may or may not also contribute to an employee’s 401(k). Employer matching—where an employer matches an employee’s contribution to their 401(k)—is one way companies encourage their employees to take advantage of the 401(k) option.

If your employer offers an employer match, you should contribute the full amount that the company matches to maximize the total compensation you receive from your employer. It is common for employers to offer a 50% to 100% match on a certain percentage of its employees’ contributions. If your employer offers a 50% match on the first 6% of your income, for example, you should contribute 6% in order to get the 3% match from your employer.

Each year, the IRS releases its contribution limits for 401(k)s, just as it does for Roth IRAs. The IRS sets much higher contribution limits on 401(k)s. In 2024, the limit for employee elective deferrals was $23,000. If you’re age 50 or over, you are allowed an additional $7,500 in catch-up contributions for a total of $30,000 in contributions. In 2025, the base limit rises to $23,500 (the catch-up contribution remained the same, for a $31,000 total limit for those 50+). And, starting in 2025, there's a benefit for those ages 60 to 63, if your employer's plan signs on to it: a higher catch-up contribution limit of $11,250. That raises the max contribution to $34,750. (The expanded catch-up also applies to 403(b), governmental 451 plans and teh federal government's Thrift Savings Plan.)

The bottom line: You can have both a Roth IRA and a 401(k). That combination gives you the benefit of your tax-deferred 401(k) at work and tax-free withdrawals in retirement from your Roth IRA.

Should I do both Roth and traditional IRAs?

Yes, you can and should contribute to both a Roth IRA and a traditional IRA. Savvy financial planners suggest you diversify your investments. If you have both a Roth IRA and a traditional IRA, you will have some money that you can withdraw from your Roth IRA tax-free in retirement while still benefiting from the tax deductions of traditional IRA contributions over many prior years.