Traditional vs. Roth IRAs: What’s the Difference?

It's more than just taxes

A smiling, relaxed woman looks out a window
Photo:

Shannon Fagan / Getty Images

Traditional and Roth individual retirement accounts are tax-advantaged retirement accounts. An individual retirement account (IRA) is one of the best tools when saving for retirement. But when signing up, you may notice that IRAs come in different categories: a traditional IRA and a Roth IRA. Both have important tax benefits, but key differences could make one better for you, depending on your financial goals and position.

The main difference comes down to when your money is taxed—before you contribute or after you withdraw. You contribute to a traditional IRA with pretax money but are taxed on your withdrawals. Conversely, you contribute to a Roth IRA with after-tax money and enjoy tax-free withdrawals. Here’s a closer look at what that means, to help you choose the right account for your financial situation.

What’s the Difference Between Traditional and Roth IRAs?

  Traditional IRA Roth IRA 
Contributions Contributions are untaxed, and you can deduct contributions from this year’s taxes Contributions were already taxed, and you cannot deduct contributions from this year’s taxes
Annual contribution limits $6,000 per year with no income limits; additional $1,000 per year allowed for age 50 or older Up to $6,000 a year (or $7,000 if you’re age 50 or older), but income limits apply
Qualified withdrawals Taxable, begin at age 59 ½ Tax-free, begin at age 59 ½
Required minimum
distributions
At around age 70 to 72 (depends on birth year) No minimum required distribution (RMD) rule
Account types and availability Widely available from most brokerage firms and many other financial companies in the form of investments, savings accounts, and CDs Widely available from most brokerage firms and many other financial companies as investments, savings accounts, and CDs

Contributions

Traditional IRAs require pretax contributions, which means you don’t pay any taxes on that income during the year of your contribution, but taxes are required on withdrawals in retirement. Ideally, you will save on taxes long term using this strategy, as you’ll hopefully have a lower income tax rate during your retirement period.

With a Roth IRA, contributions are after-tax, meaning you pay taxes on that income the year of the contribution, but qualified withdrawals are tax-free. This means all capital gains are not taxed. If you have a very long time before retirement, this could be more valuable to you than the traditional IRA pretax deduction benefit.

Annual Contribution Limits

Both accounts also have a maximum contribution amount per year, set by the IRS annually. For 2022, the annual limit for Roth and traditional IRA contributions is $6,000, or $7,000 if you’re age 50 or older. For 2023, the limits increase to $6,500 if you’re younger than 50 and $7,500 for those aged 50 or older.

However, some people can't contribute anything to a Roth IRA. Roth IRAs have an income limit for contributions, which keeps some high earners out. If your modified adjusted gross income is over IRS thresholds, the amount you can contribute phases out to zero. For 2022, individuals earning $144,000 and married couples who file jointly and earn $214,000 or more cannot contribute at all to a Roth IRA.

Note

The contribution limit is the total amount you can contribute to both account types. For example, for the 2022 tax year, the total limit is $6,000 for taxpayers younger than 50. You could put $3,000 in your Roth and $3,000 in your traditional IRA, or $4,000 in your Roth and $2,000 in your traditional IRA.

Qualified Withdrawals

Qualified withdrawals for both IRA types are available when you reach the age of 59 ½. As mentioned, traditional IRA withdrawals are taxed, while Roth IRA withdrawals are tax-free. At age 59 1/2, you’re able to withdraw from either of your retirement accounts without paying additional penalties. If you withdraw from a traditional IRA before that age, you may have to pay both taxes and a 10% tax penalty, making it a costly proposition.

You can withdraw contributions from your Roth at any time, since that money has already been taxed. But there are more rules around when you can withdraw earnings. You can only pull earnings out of a Roth after age 59 ½. Withdrawing earlier could trigger taxes and a 10% penalty.

Note

It’s possible to take penalty-free early distributions, including earnings, before age 59 ½ from both IRA types in certain circumstances, such as if you’re making your first home purchase. Speak with a tax professional before withdrawing from your IRA.

Required Minimum Distributions

You must take required minimum distributions (RMDs) at age 72 if you have a traditional IRA. The amount you must withdraw uses a complex formula based on your age and account balance. Check with the IRS or your investment brokerage to ensure you don’t make any mistakes here, as you could wind up with additional taxes or penalties.

A Roth IRA does not require the account owner to take a required minimum distribution. You can leave your contributions and earnings in your Roth IRA until you die.

Account Investments and Availability

Both IRA types allow investors to choose from any supported market investments, including ETFs, mutual funds, stocks, and bonds. You can open either IRA type at a brokerage or bank.

Which Is Right for Me?

Generally, younger investors benefit most from a Roth IRA early in their careers, as investments will grow tax-free for decades. Younger investors also may make less money annually at work and therefore fall within the income requirements to make a maximum contribution. In retirement, these investors can withdraw significant earnings without paying capital gains taxes.

For investors closer to retirement, the pretax benefits of traditional IRAs may prove more valuable, because they have fewer years for investments to grow before reaching retirement. As well, higher-income earners who make too much to contribute to a Roth can contribute to a traditional IRA.

Older investors may find a traditional IRA’s tax-deduction advantages appealing. You can also make catch-up contributions of up to $7,000 after age 50—with no income restrictions.

Note

If you’re unsure which makes the most sense for you, consider consulting with a trusted financial professional who can guide you through the process.

A Best-of-Both Worlds Option

There is no law saying you can’t have a traditional and Roth IRA. But it may be complicated to contribute to both in the same calendar year. Some savers get similar benefits of a traditional IRA when investing with an employer-sponsored 401(k) or similar retirement account while using the Roth IRA for after-tax benefits.

If you’re eligible, combining a 401(k), IRA, and health savings account (HSA) helps you layer on tax savings through multiple investment accounts. No perfect solution exists for everyone, but you can work through your budget, savings ability, and future needs to find the savings method and investment account that makes the most sense for your retirement.

The Bottom Line

Investing is critical for most Americans looking to maintain the same standard of living during retirement. Many investment experts suggest saving at least 15% of your pretax income for retirement, including through individual retirement accounts, 401(k) accounts, and other tax-advantaged accounts.

If you’re not yet saving for retirement or don’t have access to an employer-sponsored retirement account, an IRA could be perfect for you.

Frequently Asked Questions (FAQs)

Which is better, a Roth IRA or a traditional IRA?

In general, if you think your retirement tax rate will be higher than now, it may make sense to use a Roth IRA—your qualified withdrawals will be tax-free. Also, if you need access to cash before retirement for other uses, such as purchasing a home, a Roth offers tax-free withdrawals as long as you meet the exceptions’ requirements.

On the other hand, if you think your tax rate will be lower in retirement than now, or you make too much money to qualify for a Roth, a traditional IRA may make more sense.

What taxes are involved in withdrawing from a Roth IRA versus a traditional IRA?

When you turn 59 ½, you can withdraw your Roth IRA’s contributions and earnings via distribution and not pay taxes, since you’ve already paid taxes on them. When you withdraw contributions or earnings from traditional IRAs, they’re taxable. This is true whether you withdraw before age 59 ½ or not. Both types of withdrawals may incur an additional 10% penalty if the withdrawals don’t qualify for exceptions.

Was this page helpful?
Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. "Retirement Topics - IRA Contribution Limits."

  2. IRS. "Amount of Roth IRA Contributions That You Can Make for 2022."

  3. IRS. "Publication 590-B (2021), Distributions From Individual Retirement Arrangements (IRAs)."

  4. IRS. "Retirement Topics — Required Minimum Distributions (RMDs)."

Related Articles