Roth vs. Traditional IRA: What’s the Difference?
When planning for retirement, choosing the right type of Individual Retirement Account (IRA) is crucial. The two most common options—Roth IRA and Traditional IRA—offer distinct tax advantages, and understanding the key differences can help you make the best choice for your financial goals.
- Tax Treatment
- Traditional IRA: Contributions may be tax-deductible depending on your income and whether you or your spouse is covered by a workplace retirement plan. However, withdrawals in retirement are taxed as ordinary income.
- Roth IRA: Contributions are made with after-tax dollars, meaning you pay taxes now. The big benefit? Qualified withdrawals are tax-free—including both contributions and earnings.
- Income Limits
- Traditional IRA: Anyone can contribute, but the deductibility of contributions may be limited by income level and access to a workplace retirement plan.
- Roth IRA: Contributions are limited by income. For 2025, single filers earning more than $161,000 (and married couples earning over $240,000) may be ineligible to contribute directly.
- Required Minimum Distributions (RMDs)
- Traditional IRA: You must begin taking RMDs starting at age 73 (as of 2025).
- Roth IRA: No RMDs during the account holder’s lifetime, making it a great option for those who want to leave assets to heirs.
- Best Use Cases
- Traditional IRA: Best if you expect to be in a lower tax bracket in retirement. The upfront tax break can also be attractive if you need immediate tax relief.
- Roth IRA: Ideal if you’re in a lower tax bracket now and expect to be in a higher one later—or want tax-free income in retirement.
Conclusion
Both Roth and Traditional IRAs are powerful retirement savings tools. The right choice depends on your current tax situation, expected future income, and long-term financial strategy. In some cases, a mix of both might offer the best of both worlds.
When in doubt, consider consulting a financial advisor to tailor your IRA strategy to your specific needs.