Choosing Between a Traditional and Roth IRA? Check This Comparison of the Two.
Traditional and Roth IRAs are excellent savings vehicles for retirement. But when deciding on something as important as where to potentially grow your investments, it’s essential to understand the differences between the two. You may prefer one over the other or even find that you want to contribute to both.
A general overview
With a Roth IRA, you contribute money that’s already been taxed. These “after-tax” dollars have the potential to grow tax-free as long as they’re in the account. Any earnings remain tax-free and penalty-free if:
- The funds have been in the Roth account for at least five years.
- The account holder is age 59 1/2 or older or is disabled
In addition, Roth IRAs are not subject to required minimum distribution (RMD) rules during the original owner’s lifetime.
Traditional IRA contributions are generally made on a pre-tax basis, meaning you don’t have to pay taxes until you begin making withdrawals, and those withdrawals are subject to ordinary income tax.
Although you can’t deduct contributions to an after-tax account (like a Roth IRA) from your earnings for income tax purposes, you can deduct contributions to a pre-tax account (like a traditional IRA) from your income the year it’s contributed, thereby lowering your tax burden.
Traditional IRAs are subject to RMD rules.
Image source: Getty Images.
Breaking down the differences
|
Roth IRA |
Traditional IRA |
|
|---|---|---|
|
Investments |
· Earnings grow tax-free |
· Earnings grow tax-deferred |
|
Contributions |
· Made with after-tax dollars · Not tax-deductible |
· Not tax-deductible |
|
|
· Tax and penalty-free withdrawals of contributions at any time, for any reason · Tax-free and penalty-free withdrawals of earnings if you meet IRA qualified distribution requirements · Before age 59 1/2 you may incur a 10% early withdrawal penalty |
· Although certain exclusions apply, you may incur a 10% early withdrawal penalty if you take money out of the account before age 59 1/2 · Taxes are due when withdrawals are made |
|
Required minimum distributions (RMDs) |
· Not required |
· You generally must take required minimum distributions (RMDs) starting at age 73 (or age 75 if you were born in 1960 or later) |
|
Eligibility requirements |
· Must be age 18 or older · Must meet income requirements (see table below) |
· Must be age 18 or older |
Data source: IRS.
Roth IRA income and contribution limits
If you want to contribute to an IRA, there are no income limits. However, if you’re hoping to take advantage of the benefits associated with a Roth IRA, you’ll need to meet these 2025 guidelines:
|
Filing status |
Modified adjusted gross income |
Contribution limit |
|---|---|---|
|
Single |
Less than $150,000 |
$7,000 |
|
Single |
More than $150,000 but less than $165,000 |
Partial contribution |
|
Single |
Over $165,000 |
Not eligible |
|
Married, filing jointly |
Less than $236,000 |
$7,000 |
|
Married, filing jointly |
More than $236,000 but less than $246,000 |
Partial contribution |
|
Married, filing jointly |
Over $246,000 |
Not eligible |
|
Married, filing separately |
Less than $10,000 |
Partial contribution |
|
Married, filing separately |
Over $10,000 |
Not eligible |
Data source: IRS.
Where to set up a traditional or Roth IRA
Depending on the types of retirement plans offered by your employer, you may be able to set up a traditional or Roth IRA at work. It’s a great option, especially if your employer matches a portion of your contributions. Here are some other places you can easily establish a traditional or Roth IRA:
- Bank
- Credit union
- Life insurance company
- As part of a mutual fund
- Stockbroker
Whether you’re just starting to invest for retirement or you’ve decided to branch out by contributing to an IRA, the threshold for entry tends to be low. Although some brokers may require a minimum account balance, it’s typically modest, and there are plenty of other financial institutions that require no minimum balance.
