What we’ll cover:
You’ve probably heard of the two main types of Individual Retirement Accounts (IRAs): Traditional IRA and Roth IRA.
Both Traditional and Roth IRAs could help you save money for the future while potentially offering some tax advantages.
With IRAs, like all retirement accounts, the goal is the same: You put money into that account (contributions), that money generally grows over time (earnings), and then you take that money out (withdrawals) in retirement.
When it comes to taxes, here’s the main difference between a Roth vs. Traditional IRA:
There are other differences between a Traditional IRA vs. Roth IRA outlined below. If you’re considering opening one, first check your eligibility.
Contributions are made with post-tax dollars. Your withdrawals in retirement are tax free, provided you comply with the withdraw requirements (see below).
Contributions are made with pre-tax dollars and grow tax-deferred until you make withdrawals, which are taxed as income.
Contributions may be tax deductible today, depending on income and coverage under a workplace retirement plan.
$6,000 for the 2022 tax year ($7,000 for those age 50 and older). $6,500 for the 2023 tax year ($7,500 for those age 50 and older).
$6,000 for the 2022 tax year ($7,000 for those 50 and older). $6,500 for the 2023 tax year ($7,500 for those age 50 and older).
Withdrawals of your contributions are penalty and tax free, at any age. Prior to age 59½, generally, withdrawals from the interest and/or earnings are subject to income tax and a 10% penalty. Visit the IRS for more details.
If you withdraw your money prior to age 59½ you’re generally subject to income tax and a 10% penalty. After age 59½ you are subject to income tax but no penalty. Visit the IRS for more details.
Required Minimum Distributions (RMDs)
Required minimum distributions (“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.
For 2022: You cannot contribute to a Roth IRA if you’re single and your modified adjusted gross income is $144,000 or greater (or $214,000 or greater if you’re married filing jointly).
For 2023: You cannot contribute to a Roth IRA if you're single and your modified adjusted gross income is $153,000 or greater (or $228,000 or greater if you're married filing jointly).
Your contributions may be reduced at other income levels or depending on your filing status. Visit the IRS webpage for more information.
For 2022: If you're single, you cannot deduct your contribution if you’re covered by a retirement plan at work, and your modified adjusted income is $78,000 or more ($129,000 or more if you’re married filing jointly).
For 2023: If you're single, you cannot deduct your contribution if you're covered by a retirement plan at work and your modified adjusted gross income is $83,000 or more ($136,000 or more if you're married or filing jointly).
If neither you nor your spouse are covered by retirement plans at work, you can deduct the full amount up to the contribution limit.
Your deductions may be reduced at other income levels or depending on your filing status. Visit the IRS webpage for more information.
Contribute at any age.
Contribute at any age.
If you think you’ll be in a higher tax bracket when you retire, a Roth IRA might work in your favor because you’re paying taxes up front at a lower rate.
You might also just enjoy the thought of not paying taxes on your retirement income. Assuming you follow the rules associated with a Roth IRA, the money you withdraw is tax-free.
Contributions to your Roth IRA can be withdrawn at any time, for whatever reason, tax-free and penalty-free.
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.
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 versus 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 and penalties on your earnings (the money you’ve made on your contributions). The IRS outlines what you need to know (including any exceptions), but two main factors are whether you are over or under age 59½, and if you’ve held the account for at least five years.
Depending on your circumstances, your contributions to a Traditional IRA may be tax-deductible, which effectively lowers your taxable income.
A lot of this 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.
We know reading up on the IRS rules probably makes your eyes glaze over, but we’d recommend doing so if you’re hoping for a tax deduction. Otherwise, talk to your tax advisor or tax professional.
You’re only allowed to contribute to a Roth IRA if you meet certain income rules (see “Income Limits” in the table above). With a Traditional IRA, you can contribute up to the full amount permitted regardless of your income. However, keep in mind that above a certain income, you may not qualify for a tax deduction on your contributions.
If you think your income will be lower in retirement than it is now, your effective tax rate may be lower as well. For instance, this could be true if you are in the peak of your career and expect a lower income in retirement. If that’s the case, the potential benefit of a tax deduction today may be worth more than tax-free withdrawals from a Roth IRA.
For some, a Roth IRA can be an obvious choice because of the tax-free withdrawals in retirement and overall flexibility. On the flip side, the biggest draw for a Traditional IRA is the potential tax break up front. This may be a great incentive to save for retirement.
At the end of the day, choosing between a Roth IRA vs. Traditional IRA is your call (just remember to check your eligibility first). Once you have a solid grasp on the differences between the two, you can decide what’s best for you.
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