Both individual retirement account (IRA) types — traditional and Roth — offer valuable retirement-planning benefits, but with different structures, income limits, and pros and cons.
Key takeaways
Traditional IRAs offer the potential for tax deductibility in the present, while Roth IRA contributions are made with after-tax dollars.
Withdrawals are also taxed differently: Income taxes are due on distributions from a traditional IRA. Qualified Roth IRA withdrawals, however, are tax-free.
Eligibility to contribute to a Roth IRA is based on your income. Anyone with earned income can contribute to a traditional IRA, but your income and other factors affect how much of an upfront tax break (if any) you can claim.
Both types of IRA are sound choices for saving for the future, and having a mix gives savers a balance of tax breaks both now and down the road.
How the traditional IRA works
A traditional IRA helps you save for retirement and might give you a tax break today. For example, if you contribute $4,000 to a traditional IRA this year, you may be able to deduct that amount on your tax return. This allows you to enjoy a nice break on your obligation to the IRS — subject to income limitations — while your investment continues to grow. Your money will grow tax-deferred until it’s withdrawn.
You can continue to contribute funds up to the annual contribution limit every year: $7,000 for those under 50 and an additional $1,000 (for a total of $8,000) for those over 50 in 2025.
You can start making penalty-free withdrawals at age 59 1/2, and you must begin making withdrawals by the age of 73 or you’ll pay stiff penalties to the IRS. Whenever you do start taking money out, though, you will pay income taxes on the deductible contributions you made and the investment gains.
How the Roth IRA works
A Roth IRA doesn’t provide any immediate tax benefits. So, if you decide to contribute $4,000 to a Roth IRA this year, it’s all after-tax money, meaning you won’t get to deduct the amount you save from your taxes. The benefits of a Roth shine when you begin to make withdrawals at age 59 ½ or later — all the compounded growth that has built up over the years is yours to keep tax-free.
Unlike a traditional IRA, there is no timestamp for when you must start making Roth withdrawals. You can wait longer to access the cash, or even leave money in the account forever so it passes to your heirs free of income taxes.
The annual contribution limits for a Roth IRA are the same as a traditional IRA: $7,000 for those under 50 and $8,000 for those over 50 in 2025.
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