Roth IRA vs. Traditional IRA

A Roth IRA and a traditional IRA are two types of individual retirement accounts, also known as individual retirement arrangements (IRAs). Each provides people a way to save and invest money primarily for retirement. But while the two accounts function similarly, they have different rules and regulations.

Stephen Kates, Certified Financial Planner™ and personal finance expert
  • Written by
    Stephen Kates, CFP®

    Stephen Kates, CFP®

    Certified Financial Planner™ Professional and Founder of Clocktower Financial Consulting

    Stephen Kates is a Certified Financial Planner™ professional and personal finance expert with over a decade of experience working with individuals and families who need help with their finances. With experience as a financial advisor for two of the largest financial firms in the country, Stephen has worked with hundreds of clients to build comprehensive financial plans to grow and protect their wealth.

    Read More
  • Edited By
    Michael Santiago
    headshot of Michael Santiago

    Michael Santiago

    Senior Financial Editor

    Michael Santiago, a senior financial editor, joined RetireGuide in 2023. With over 10 years of professional writing and editing experience, he brings a wealth of expertise in creating content for diverse industries, including travel and healthcare. Having traveled to more than 40 countries across five continents and lived in Europe and Asia for several years, Michael's global perspective enriches his work. He combines his strong writing skills, editorial judgment and passion for crafting accurate and engrossing content to enhance the user experience on RetireGuide.

    Read More
  • Reviewed By
    Toby Walters, CFA®
    Toby Walters, CFA

    Toby Walters, CFA®

    Chartered Financial Analyst and Paraplanner

    Toby Walters, CFA®, has over 25 years of financial research experience. With a knowledge and understanding of researching and analyzing financial data, he has developed a unique and experienced viewpoint on money matters. He has been a chartered financial analyst since 2003, and most recently a portfolio analyst and paraplanner.

    Read More
  • Published: October 4, 2023
  • Updated: October 6, 2023
  • 8 min read time
  • This page features 5 Cited Research Articles
Fact Checked
Fact Checked

A qualified expert reviewed the content on this page to ensure it is factually accurate, meets current industry standards and helps readers achieve a better understanding of retirement topics.

Cite Us
How to Cite RetireGuide.com's Article

APA Kates, S. (2023, October 6). Roth IRA vs. Traditional IRA. RetireGuide.com. Retrieved May 21, 2024, from https://www.retireguide.com/retirement-planning/investing/accounts/ira/roth-ira-vs-traditional-ira/

MLA Kates, Stephen. "Roth IRA vs. Traditional IRA." RetireGuide.com, 6 Oct 2023, https://www.retireguide.com/retirement-planning/investing/accounts/ira/roth-ira-vs-traditional-ira/.

Chicago Kates, Stephen. "Roth IRA vs. Traditional IRA." RetireGuide.com. Last modified October 6, 2023. https://www.retireguide.com/retirement-planning/investing/accounts/ira/roth-ira-vs-traditional-ira/.

Key Takeaways
  • Roth IRAs allow you to contribute after-tax dollars to your account and enjoy tax-free growth and withdrawals in retirement.
  • Traditional IRAs are funded with pre-tax dollars but require you to pay income tax on your withdrawals.
  • Contributions to both types of IRAs can be made up to a yearly maximum of $6,500 for individuals under 50, and $7,500 for those aged 50 and over (as of 2023).
  • Consult an advisor to find the best IRA option for you as neither type is inherently superior.

What Is a Roth IRA?

A Roth IRA allows you to contribute after-tax funds into a retirement account. When you decide to withdraw, you may do so tax-free if you have satisfied the holding period and age requirements. Meanwhile, your money can be invested within the account to potentially increase its value. The goal is for your investments to generate dividend and interest payments.

A Roth account comes with contribution limits.

You can contribute to your IRA account in a given tax year up to the limit if:
  • You earned less than $138,000 during that tax year while filing as a single person, head of household or married filing separately
  • You earned no more than $218,000 as a married couple filing jointly or qualifying widow(er)

For 2023, you can contribute up to $6,500 if you’re under 50 or $7,500 if you’re age 50 or older. Note that the deadline for contributions is the following year’s unextended federal tax deadline.

You can take your contributions from the Roth account at any time without taxes or penalties. However, withdrawing any of the growth earned from investments before age 59 1/2 and/or a 5-year holding period may trigger income taxes and/or a 10% tax penalty on those funds. There are a few exceptions to this rule, such as withdrawals to pay medical expenses, a higher education or to buy a first home.

Consult with a financial advisor before setting up a Roth IRA and before you contribute to it. A financial counselor will weigh in on whether a Roth makes sense for you and your retirement goals. Additionally, if you own a Roth IRA and expect to take an early withdrawal, speak to an advisor to make sure you understand and plan for the tax implications.

What Are the Advantages and Disadvantages of a Roth IRA?

Roth IRAs have advantages and disadvantages. Weigh both sides carefully when thinking about contributing to one.

Pros and Cons of a Roth IRA
Pros
  • Withdrawals and growth are tax-free
  • You can invest in a wide range of assets
Cons
  • Subject to income limits
  • Taxes and a 10% penalty on early withdrawals
Is Your Retirement Plan on Track?
Explore annuity solutions that align with your planning needs.
*Ad: Clicking will take you to our partner Annuity.org.

What Is a Traditional IRA?

A traditional IRA is a retirement account that offers tax-free contributions and growth. You can contribute up to $6,500 to this account in 2023 (or $7,500 if you’re age 50 or older).

When you put money into a traditional IRA, you can deduct some or all of that contribution from your yearly income taxes if you fall below the modified adjusted gross income (MAGI) income ceiling ($83,000 for single filers and $136,000 for joint filers). You then can make investment decisions about the assets you want.

The goal is to have your investment grow tax-free until you’re ready to withdraw during retirement. Unlike a Roth IRA, any money you withdraw from your traditional IRA is taxed as regular income.

You must be at least 59 1/2 to take money out of a traditional IRA account to avoid a tax penalty. If you’re younger, you’ll pay a 10% tax penalty in addition to the normal income taxes on the withdrawal. Similar to the Roth IRA, there are exceptions to the penalty under certain circumstances.

At some point, after you reach your full retirement age, you’ll be required to take a specific amount of money out of your account each year. The amount of this Required Minimum Distribution (RMD) depends on how much you have saved and other factors. Before setting up a traditional IRA, talk to your financial advisor about your savings goals and other considerations.

What Are the Advantages and Disadvantages of Traditional IRAs?

Traditional IRAs have advantages and disadvantages. Consider these when thinking about using one of these accounts to save for your retirement.

Pros and Cons of a Traditional IRA
Pros
  • Contributions can be tax-deductible
  • Growth is tax-deferred
  • You can invest in a wide range of assets
Cons
  • You’ll owe income tax on all withdrawals
  • 10% penalty on early withdrawals

Comparing Roth and Traditional IRAs

Roth and traditional IRAs differ in four key areas: taxation, RMDs and contribution limits, withdrawal penalties, and estate planning.

It’s essential to consider your individual financial situation, long-term goals, and risk tolerance when deciding which type of IRA is best suited for you. Each area is a topic to review with your financial advisor as you map out your retirement planning strategy. A financial advisor can help analyze your circumstances, guide you through the complexities of IRAs, and tailor a personalized retirement plan that aligns with your specific needs and aspirations.

If you’re undecided between using a Roth IRA or a traditional IRA as a retirement savings vehicle; why not use both? Future tax rates are unknown. By utilizing this form of tax diversification, you’re potentially lowering your taxes in retirement.
Toby Walters, CFA
Tobin Walters Chartered Financial Analyst and Paraplanner

Taxation

Traditional IRAs are funded from pre-tax dollars. Also, your investments grow tax-deferred until you withdraw your money. You must pay taxes on the money you take out, but if you take out money before you turn 59 1/2, you’ll pay an additional 10% tax penalty.

Money that you put into a Roth IRA comes from after-tax dollars. You won’t owe tax on any investment growth or future withdrawals. However, if you withdraw money before age 59 1/2 and/or before the 5-year holding period, you may owe taxes and/or a 10% tax penalty on the portion of that withdrawal derived from investment income. The portion derived from your contributions is tax-free regardless of when it is withdrawn.

Required Minimum Distribution (RMD) and Contribution Limits

Contribution limits are the same for traditional and Roth IRAs: $6,500 if you are younger than 50 and $7,500 if you’re 50 or older (for 2023).

The difference between the two accounts is in RMDs. You must take some money from your traditional IRA once you turn 73.

The amount depends on your life expectancy and other factors.

Roth IRAs have no RMD requirements.

Withdrawal Penalties

Both IRA types have a 10% withdrawal penalty for people younger than age 59 1/2. The same set of exceptions also applies to both Roth and traditional.

However, early withdrawal penalties only apply to earnings withdrawn from a Roth IRA. You can take out any money you put into the account without incurring a penalty. In short, early withdrawals from a Roth IRA are less punishing than those from a traditional IRA.

Estate Planning and Inheritance

You can pass both traditional IRAs and Roth IRAs to your heirs. However, withdrawals from an inherited traditional IRA are taxed as ordinary income, while withdrawals from an inherited Roth IRA are generally tax-free.

Which IRA Type Is Better?

One type of IRA isn’t always better than the other. Each serves a specific purpose. To choose the right one for you, consider your current financial circumstances and future goals. The primary consideration when choosing between the two types usually comes down to taxation.

How To Decide Which Is Right for You

Think about your current and future tax obligations and your estate planning needs. You might prefer a traditional IRA if you expect your income to fall significantly during retirement. You might want a Roth IRA if you intend to leave money in that account for your heirs. However, keep in mind that you may not be eligible for a Roth IRA if your income is higher than the maximum threshold.

Many people contribute to both types of accounts to take advantage of their different benefits. Investing in both provides tax diversification. Since it’s not known what tax rates will be in the future or what your taxable income in retirement might be with RMDs, then it might make sense to have some of your retirement savings in a traditional IRA and some in a Roth IRA.

Talk to your financial advisor about what options work best for you.

Beat the Bank With Fixed Annuity Rates As High As 6%
Start with a zero-commitment conversation to learn how annuities can help fund your retirement.
*Ad: Clicking will take you to our partner Annuity.org.

FAQs About Roth IRAs vs. Traditional IRAs

Can you have both types of IRAs?
Yes, you can contribute to both a Roth IRA and a traditional IRA at the same time if you meet all the requirements. If you’re under 50, you can contribute up to $6,500 between both accounts in 2023. If you’re 50 or over, you can contribute up to $7,500 between both accounts.
Do Roth or traditional IRAs have age limits?
There’s no age limit for Roth IRAs or traditional IRAs. You can contribute to either type of account at any age if you have taxable income for that year, but you’ll need to take Required Minimum Distributions (RMDs) each year from your traditional IRA if you’re age 73 or older.
Can you deduct your IRA contributions from your taxes?
Yes, you can deduct your IRA contributions from your taxes if you are contributing to a traditional IRA. If you’re contributing to a Roth IRA, you’ll pay income taxes on your contributions now for not having to pay them on your withdrawals during retirement.
Advertisement

Connect With a Financial Advisor Instantly

Our free tool can help you find an advisor who serves your needs. Get matched with a financial advisor who fits your unique criteria. Once you’ve been matched, consult for free with no obligation.

Last Modified: October 6, 2023

5 Cited Research Articles

  1. Internal Revenue Service. (2023, March 14). Retirement Plan and IRA Required Minimum Distributions FAQs. Retrieved from https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs
  2. Internal Revenue Service. (2023, February 21). Traditional and Roth IRAs. Retrieved from https://www.irs.gov/retirement-plans/traditional-and-roth-iras
  3. Internal Revenue Service. (2022, October 26). Amount of Roth IRA Contributions That You Can Make For 2023. Retrieved from https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2023
  4. U.S. Securities and Exchange Commission. (n.d.). Traditional and Roth 401(k) Plans. Retrieved from
  5. https://www.investor.gov/additional-resources/retirement-toolkit/employer-sponsored-plans/traditional-and-roth-401k-plans