Traditional vs. Roth IRA: Which Is Right for You?

December 4, 2024

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What we’ll cover:

Both Traditional and Roth IRAs can help you save for retirement.
With a Traditional IRA, you contribute with pre-tax dollars and your money grows tax-deferred until retirement.
With a Roth IRA, you contribute with after-tax dollars, but withdrawals in retirement are tax-free once certain conditions are met.

Both Traditional and Roth IRAs can help you save money for the future while offering potential tax advantages.

With IRAs, like all retirement accounts, the goal is the same: You put money into the account (contributions), that money is allowed to grow over time (your potential earnings), and then you take that money out in retirement (withdrawals).

When it comes to taxes, here’s the key difference between a Traditional and Roth IRA:

With a Traditional IRA, your contributions are made with pre-tax dollars and can grow tax-deferred until you withdraw your money in retirement.
With a Roth IRA, you contribute money that you’ve already paid taxes on (after-tax dollars), and your withdrawals in retirement are tax-free once certain conditions are met.

Here are other important differences between a Traditional IRA and Roth IRA.

Overview: Traditional IRA vs. Roth IRA

Traditional IRA

Roth IRA

	Traditional IRA	Roth IRA
Maximum annual contribution limits	Up to $7,000 for the 2024 and 2025 tax year ($8,000 for those 50 and older - see catch-up contributions at IRS.gov).	Up to $7,000 for the 2024 and 2025 tax year ($8,000 for those 50 and older – see catch-up contributions at IRS.gov).
Who can contribute?	You can contribute if you have taxable employment income.	You can contribute if you have taxable employment income and can meet certain criteria regarding your income and tax filing status. Visit IRS.gov for more details on eligibility rules.
Withdrawals	Withdrawals prior to the age of 59 ½ are generally subject to income tax and a 10% early withdrawal penalty unless you qualify for an exception. After the age of 59 ½, withdrawals are subject to income tax, but there’s no early withdrawal penalty.	Contributions can be withdrawn tax-free and penalty-free at any time. Withdrawals of earnings prior to the age of 59 ½ (or before the account is 5 years old) are generally subject to income tax unless it’s a qualified distribution and to a 10% early withdrawal penalty unless you qualify for an exception.
Required Minimum Distributions (RMDs)	RMDs are withdrawals that you must make from Traditional IRAs starting at age 73 (or age 72 if you turned 72 on or before December 31, 2022). RMDs are required by the IRS, and failure to take RMDs may result in penalties. Check with the IRS to get the full details on the timing of your RMD obligations.	No RMDs if you’re the original owner of the account. Visit the IRS for more details.
Tax deduction	Contributions may be tax-deductible if you meet certain eligibility rules. If you or your spouse is covered by a workplace retirement plan (e.g., 401(k)), you may not be able to deduct contributions made to this type of IRA. Visit IRS.gov for more information.	Contributions are not tax-deductible.

Reasons to consider a Traditional IRA

Tax-deferred growth

With a Traditional IRA, your retirement money can potentially grow tax-deferred - that is, you won't have to pay taxes on it until you take out the money in retirement.

Potential tax deduction for your contributions

Depending on your circumstances, your contributions to a Traditional IRA may be tax-deductible, which could help lower your taxable income.

Eligibility depends on your annual income, tax filing status (single, married filing jointly, married filing separately), and whether or not you’re covered by a retirement plan at work. If you have questions about whether you can claim a deduction, consult a tax professional or visit IRS.gov.

No income restrictions for contributing

You’re only allowed to contribute to a Roth IRA if you meet certain income rules (visit IRS.gov for more information). But with a Traditional IRA, you can contribute up to the maximum annual contribution limit as long as you have taxable employment income. However, keep in mind that if you make above a certain income, you may not qualify for a tax deduction on your contributions.

Reasons to consider a Roth IRA

Tax-free withdrawals in retirement

Remember, with Roth IRAs, your contributions are made with after-tax dollars, but your withdrawals in retirement are tax-free so long as certain conditions are met – for example, you’ve reached the age of 59 ½ and you’ve had the account for at least five years.

Withdrawals of your account earnings before the age of 59 ½ (or before the accounts is five years old) are generally subject to income tax unless it’s a qualified distribution and to a 10% early withdrawal penalty unless you qualify for an exception.

Tax diversification if you have other retirement accounts

If you contribute pre-tax earnings to other retirement plans, such as a 401(k), withdrawals from those accounts will generally be considered taxable income. If eligible, having a Roth IRA in the mix might be a good way to diversify your retirement income since you’ll be able to withdraw from that account without paying tax as long as certain conditions are met.

Flexible early withdrawal rules

Although you should proceed with caution if you’re considering an early withdrawal, accessing money in a Roth IRA ahead of retirement can be a little easier than it would be compared to a Traditional IRA. Contributions to your Roth IRA can be withdrawn at any time, for whatever reason, tax- and penalty-free.

That being said, you may have to pay taxes on the withdrawals of your earnings (the money you’ve made on your contributions). The IRS outlines what you need to know about early withdrawal penalties (including any exceptions) here, but two main factors to keep in mind are whether you are over or under age 59½ and if you’ve held the account for at least five years.

Bottom line

At the end of the day, choosing between a Traditional IRA and Roth IRA depends on your circumstances and goals (just remember to check your eligibility first). Once you have a solid grasp on the differences between the two, you can decide which is best for you. You might even end up using both IRAs to help you save for retirement. If you have questions about your options, consult a financial advisor.

This article is for informational purposes only and is not a substitute for individualized professional tax advice. Individuals should consult their own tax advisor for matters specific to their own taxes. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA, Goldman Sachs & Co. LLC or any of their affiliates, subsidiaries or divisions. Goldman Sachs Bank USA and Goldman Sachs & Co. LLC are not providing any financial, economic, legal, accounting, tax or other recommendations in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA, Goldman Sachs & Co. LLC or any of their affiliates. Neither Goldman Sachs Bank USA, Goldman Sachs & Co. LLC nor any of their affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements of any information contained in this document and any liability therefore is expressly disclaimed.