How Traditional and Roth IRAs Differ in Taxes, Withdrawals, and Rules

The core difference: when you pay taxes

A Traditional IRA lets you deduct contributions from your income taxes now, but you pay taxes on the money when you withdraw it in retirement. A Roth IRA takes the opposite approach: you contribute after-tax dollars (no deduction today), but withdrawals in retirement are tax-free. The choice between them hinges on whether you expect to be in a higher or lower tax bracket when you retire.

If you think your tax rate will be lower in retirement than it is now, a Traditional IRA often makes more sense—you save taxes at a higher rate today and pay at a lower rate later. If you think your tax rate will be the same or higher in retirement, a Roth IRA can be the better move, because you lock in today's tax rate and pay nothing later.

Neither account is "better" in absolute terms. The right choice depends on your current income, your expected retirement income, and how long you plan to let the money grow.

Key Takeaways

• Traditional IRA contributions may reduce your taxable income this year, but you owe income tax on all withdrawals in retirement.
• Roth IRA contributions do not reduce your taxes now, but you withdraw money tax-free in retirement and pay no tax on the growth.
• Traditional IRAs require you to start taking withdrawals at age 73, while Roth IRAs have no required withdrawals during your lifetime.
• Roth IRAs let you withdraw your contributions (not earnings) at any time without penalty, while Traditional IRAs charge a 10% penalty on early withdrawals before age 59½.
• Income limits restrict who can contribute to a Roth IRA, but Traditional IRA contributions are available to anyone with earned income, regardless of how much you earn.

How taxes work during contribution and withdrawal

When you put money into a Traditional IRA, you may deduct that contribution on your tax return in the year you make it. That deduction lowers your taxable income for that year. For example, if you earn $60,000 and contribute $7,000 to a Traditional IRA, your taxable income drops to $53,000. You do not pay income tax on that $7,000 until you withdraw it.

When you withdraw from a Traditional IRA in retirement, the entire amount—your original contributions plus all the growth—is taxed as ordinary income. If you withdraw $50,000 in a year when you have other income, that $50,000 is added to your total income for tax purposes.

With a Roth IRA, you contribute money that you have already paid income tax on. You get no deduction. But when you withdraw in retirement, you owe no income tax on any of it—not on your contributions, not on the growth, nothing. If your Roth account grows from $50,000 to $200,000 over 30 years, you withdraw the full $200,000 tax-free.

This tax-free growth is the Roth's main advantage. The longer your money sits in the account, the more valuable the tax-free treatment becomes.

Required withdrawals and access to your money

A Traditional IRA requires you to start taking withdrawals at age 73, whether you need the money or not. These are called Required Minimum Distributions (RMDs). The IRS calculates the minimum amount based on your age and account balance. If you do not take the full amount, you owe a penalty on the shortfall.

A Roth IRA has no required withdrawals during your lifetime. You can leave the money untouched for as long as you want, and it continues to grow tax-free. This makes a Roth useful if you do not need the money in retirement or want to leave it to heirs.

Both accounts penalize you for withdrawing before age 59½, but the rules differ. With a Traditional IRA, any withdrawal before 59½ is taxed as income plus hit with a 10% penalty. With a Roth IRA, you can withdraw your contributions (the money you put in) at any time without penalty or tax. You can only withdraw earnings (the growth) penalty-free after 59½, though some exceptions exist for first-time home purchases, education expenses, and other hardships.

Income limits and who can contribute

Anyone with earned income can contribute to a Traditional IRA, no matter how much money they make. There are no income limits. However, if you or your spouse have access to a workplace retirement plan like a 401(k), your ability to deduct your Traditional IRA contribution phases out at higher income levels. The phase-out ranges change each year.

Roth IRAs have strict income limits. If your income exceeds a certain threshold, you cannot contribute directly to a Roth. These limits also change each year and depend on your filing status (single, married filing jointly, etc.). For 2024, the phase-out for single filers begins at $146,000 and ends at $161,000, but check the current year's limits before you plan.

If your income is too high for a direct Roth contribution, some people use a "backdoor Roth" strategy—contributing to a Traditional IRA and then converting it to a Roth—but this involves tax complications and is not right for everyone.

Contribution limits and catch-up contributions

Both Traditional and Roth IRAs share the same annual contribution limit. For 2024, you can contribute up to $7,000 per year (or $8,000 if you are age 50 or older, using the catch-up provision). These limits explore to your combined contributions across all IRAs you own—you cannot contribute $7,000 to a Traditional IRA and another $7,000 to a Roth in the same year.

The contribution limit changes periodically to keep pace with inflation. Check the IRS website or your financial institution each January to confirm the current year's limit.

Inherited IRAs and passing money to heirs

When you leave a Traditional IRA to a non-spouse heir, they must withdraw the entire balance within 10 years and pay income tax on all withdrawals. This can create a large tax bill in a single year or force them to spread withdrawals over a decade.

When you leave a Roth IRA to a non-spouse heir, they must also withdraw within 10 years, but those withdrawals are tax-free. This makes a Roth a powerful tool for leaving money to the next generation. If you have the choice between funding a Traditional or Roth IRA and you plan to leave the money to heirs, the Roth's tax-free inheritance is a significant advantage.

Which one should you choose

Choose a Traditional IRA if you want to lower your taxable income this year, expect to be in a lower tax bracket in retirement, or earn too much to contribute to a Roth. It is also useful if you have a workplace 401(k) and want to keep your retirement savings in one type of account.

Choose a Roth IRA if you expect to be in the same or higher tax bracket in retirement, want tax-free withdrawals and growth, value the flexibility of no required withdrawals, or want to leave tax-information programs to heirs. A Roth is also a good choice early in your career when your income is lower and you can lock in a low tax rate on the growth.

Many people benefit from having both types of accounts. You might fund a Traditional IRA one year to reduce current taxes and a Roth in another year to build tax-free retirement savings. A financial advisor or tax professional can help you decide based on your specific situation.

Frequently Asked Questions

Can I have both a Traditional and Roth IRA at the same time?

Yes, you can own both accounts simultaneously. However, your annual contribution limit applies to your combined contributions across all IRAs. If you contribute $4,000 to a Traditional IRA in a year, you can only contribute $3,000 to a Roth that same year (assuming the $7,000 limit for 2024).

Can I convert a Traditional IRA to a Roth?

Yes, you can convert all or part of a Traditional IRA to a Roth at any time. You will owe income tax on the amount converted in that tax year, but the money then grows tax-free in the Roth. This strategy is sometimes called a "Roth conversion" and can make sense if you expect tax rates to rise or want to reduce future required withdrawals.

What happens to my IRA if I change jobs?

Your IRA is separate from your employer, so changing jobs does not affect it. You can keep contributing to your existing Traditional or Roth IRA. If you have a 401(k) from your old job, you can roll it into a Traditional IRA, but rolling a 401(k) into a Roth IRA triggers taxes on the amount converted.

Do I have to report my IRA on my tax return?

You report Traditional IRA contributions as a deduction on your tax return. Roth contributions are not deductible, so you do not report them. If you take distributions, both types require reporting on your return. Your IRA custodian sends you a Form 1099-R each year you take a withdrawal.

What if I need money before retirement?

With a Traditional IRA, early withdrawals before 59½ are taxed as income and hit with a 10% penalty. With a Roth IRA, you can withdraw your contributions anytime without penalty or tax, but withdrawing earnings before 59½ triggers the 10% penalty. Some exceptions exist for first-time home purchases, education, and medical hardship.