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Traditional v. Roth IRAs: What You Need to Know

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Key takeaways

  • There are two main types of IRAs, or Individual Retirement Accounts: traditional and Roth. The key difference between them is how contributions and withdrawals are taxed.
  • With a traditional IRA, taxes are paid at the time you make retirement withdrawals, while your contributions are made pre-tax. With a Roth IRA, taxes are paid at the time you contribute to the account and your withdrawals are generally tax-free.
  • You can only contribute up to $6,000 total — or $7,000 if you’re over the age of 50 — per year to all your IRAs combined. However, you can transfer as much as you want into an IRA as part of a rollover.
  • Both traditional and Roth IRAs provide tax benefits and can be great tools for saving for retirement — choosing one depends on when you want to pay your taxes.

An IRA, or Individual Retirement Account, is an investment account to help you save for retirement. If you’re familiar with a 401(k) through your employer, an IRA is similar. However, unlike a 401(k), IRAs are opened by individuals and do not involve your employer (hence the name – individual!)

IRAs come in two main flavors: traditional and Roth. The main difference is that a traditional IRA is funded with tax-deductible contributions, meaning you won’t pay taxes on the money until you withdraw it later. A Roth IRA, on the other hand, is funded with after-tax contributions, so your money can grow and later be withdrawn tax-free.

Almost anyone can open IRAs, though there are some eligibility and contribution rules. They’re also a popular option for those transferring an old 401(k) — this is called a rollover. In most cases, you’ll have to roll your 401(k) over into a traditional IRA to match the original account’s tax type, but there are exceptions to this rule if you have access to a Roth 401(k).

The rest of this guide will help answer your questions on the key differences between a traditional IRA v. Roth IRAs.

Before we get into all the details, let’s outline some of the key points about both Roth and traditional IRAs:
Traditional IRA Roth IRA
Eligibility Anyone with a taxable income Single filers making up to $140,000 or joint filers making up to $208,000
Contribution Limits $6,000 annually (or $7,000 for those over 50) $6,000 annually (or $7,000 for those over 50)
Tax Status Deductible at contribution, but taxed at withdrawal Taxed at contribution, but not taxed at withdrawal
Withdrawal Rules Cannot be withdrawn until age 59 ½ without 10% penalty and income tax (with limited exceptions) 
  • Contributions can be withdrawn before age 59 ½ without 10% penalty or income tax; earnings can’t be withdrawn before age 59 ½ without penalty
  • Withdrawals will only be tax-free if the Roth IRA is at least five years old
Usually best for Those in a higher tax bracket today than they expect to at withdrawal Those who anticipate being in a higher tax bracket at withdrawal than today
Want all the details? Keep reading for the full scoop.

Traditional and Roth IRAs have slightly different rules when it comes to eligibility and yearly contributions.

Just about everyone is eligible to make contributions to a traditional IRA. You just have to have a taxable income equal or greater than the amount you contribute.

Roth IRAs, on the other hand, have eligibility limits based on your adjusted gross income, or AGI. For 2021, single filers become ineligible to make Roth contributions if they earn over $140,000 — or $208,000 for those filing jointly. However, there is a tactic called a “backdoor Roth IRA,” which is when you convert a traditional IRA into a Roth, paying income taxes on the money when you do so.

For both traditional and Roth IRAs, there are strict contribution limits that apply to all the IRAs you might have. For example, in 2021, the contribution limit is $6,000 per year — or $7,000 for those aged 50 or over. So, if you had two IRAs, you could contribute $3,000 to each, or $5,000 to one and $1,000 to the other, etc., as long as you don’t exceed the total limit.

To recap, here’s a summary of your limits based on age:

IRA Type Contribution Limits if you are under 50 Contribution limits if you are 50 or older
Traditional $6,000 $7,000
Roth (also subject to income limits) $6,000 $7,000

Another important difference is how you can – or can’t – deduct your contributions from your taxes. Traditional IRA deductions depend on your income level and tax status (single, married, etc.). You’ll be able to deduct either the full amount of your contribution, a reduced amount, or none of your contribution depending on your situation.

Your Roth IRA contributions, on the other hand, are never tax-deductible. Remember, your Roth contributions are always made post-tax so that your withdrawals later are tax-free – even your investment gains!

Yes! But like we mentioned, you can’t exceed the total contribution limits outlined above — no matter what blend of IRA types you might have.

Keep in mind that you may need both a traditional and a Roth IRA if you’re rolling over an old 401(k). For instance, maybe some of the assets in your existing retirement account are pre-tax, while others are post-tax. In that case, you’ll need both a traditional rollover IRA and a Roth IRA so that all of the funds keep their same tax status: traditional (pre-tax) to traditional; Roth (post-tax) to Roth.

Both traditional and Roth IRAs are designed to help you save for retirement — so they’re subject to special rules about when and how you can make withdrawals.

Generally speaking, you can’t take distributions from an IRA before reaching age 59 ½ without paying an early withdrawal penalty of 10%, in addition to any taxes you owe if it’s a Traditional IRA. There can be special exceptions, such as in cases of medical or financial hardship – the specifics will depend on your plan.

There are, however, some important nuances for Roth and Traditional IRAs.

Because you’ve already paid taxes on the money you contribute to a Roth, you can take out Roth contributions at any time without paying taxes or an early distribution penalty. However, any earnings you withdraw from a Roth before age 59 ½ will come with that 10% penalty.

Furthermore, Roth IRAs aren’t subject to required minimum distributions, or RMDs. Required minimum distributions force those who hold traditional IRAs to begin making withdrawals once they reach a certain age — usually 72. Roth IRAs aren’t subject to RMDs until after the death of the account holder, which makes them ideal for passing on assets to heirs.

Keep in mind that no matter whether you choose a Roth v. traditional IRA — or both — you’ll still have to pay taxes on the money. It’s just a question of when.

Roth IRAs carry the benefit of allowing your funds to grow tax-free, and also allow you to make tax-free withdrawals once you reach age 59 ½. But in order to make contributions to a Roth, you’ll have to pay income taxes on the money today, instead of getting a nice tax deduction on your traditional IRA contributions.

When deciding whether a Roth v. traditional IRA is right for you, think about your tax bracket. Retirement funds are taxed as regular income, so ideally you want to pay your taxes when your income bracket is at its lowest. As a general rule of thumb:

  • If you’re making more money now than you think you will when you withdraw, it might make sense to fund a traditional account – you’ll pay taxes later at a lower tax rate
  • If you’re making less money now than you think you’ll make when you withdraw, a Roth may help you save taxes in the long run because you’ll pay taxes now at a lower tax rate

Of course, the decision depends on your individual financial situation. If you aren’t sure, consider asking a financial or tax advisor for help.

Whether you choose a traditional IRA or a Roth IRA, there are several factors to consider when opening an account:

  • Do you want an automated IRA (where investment decisions are made for you), or a self-directed IRA (where you can allocate assets yourself and choose which stocks, bonds, and ETFs to purchase)? Automated IRAs provide ease of use, whereas self-directed accounts offer more control; it’s up to your personal preferences.
  • How easy is the account to access and use? Each provider has a different set of tools to allow you to control and manage your account, and some are more user friendly than others.
  • What are the fees involved? You may have to pay annual maintenance fees, trade fees and commissions, or maintain a minimum balance in the account.

You have plenty of options, so make sure you do your homework to find the provider that works best for you and your savings goals.

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