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

Trying to choose between a traditional individual retirement account (IRA) and a Roth IRA? 

They both offer tax-advantaged ways to save for retirement, so a basic starting question is: What kind of tax advantage would you prefer? To put off paying taxes on your savings until you retire, or to get it over with now by paying today? 

Of course, the time component of your tax preferences is only part of the story. These accounts also come with various eligibility rules and contribution limits that could affect your choice, but doing some basic tax planning should get you in the right head space for making a final call.  

A traditional IRA is an individual retirement account that allows you to make contributions on a pre-tax basis (if certain requirements are met) and pay no taxes until you withdraw the money. Potential earnings may grow on a tax-deferred basis. After age 59½, withdrawals are taxed at ordinary income rates. Withdrawals before then may be subject to a 10% early withdrawal penalty and state-tax penalties. Finally, at age 73, you'll be required to withdraw a minimum amount—known as a required minimum distribution (RMD)—each year or face a potential penalty on any shortfall. 

In contrast, Roth IRA contributions are made with after-tax dollars. You can withdraw contributions to a Roth account anytime, tax- and penalty-free. Potential earnings may grow tax free, but withdrawals of earnings are tax-free only after age 59½, so long as you made the first contribution to the account more than five years ago. Otherwise, you may have to pay taxes on the earnings portion. (If you withdraw earnings before age 59½, you will also face an additional tax penalty on the earnings portion.) And there are no RMDs. 

For 2024 and 2025, the maximum amount you can contribute across all your IRAs—traditional or Roth—is $7,000 ($8,000 if you're age 50 or older). However, some rules affect IRA contributions and deductibility. 

To start, if neither you nor your spouse is offered a retirement plan by an employer, there's no income limit for contributing to a traditional IRA, and your contribution is fully deductible. However, if either of you participates in a workplace retirement plan, deductibility phases out depending on your filing status and income.  

With Roth IRAs, you can contribute only if your income is within certain limits. 

A general guideline is that if you think the tax rate on your withdrawals in retirement will be higher than your marginal tax bracket today, you may want to consider a Roth IRA—especially if you're younger and have yet to reach your peak earning years. After all, it's generally better to pay a lower tax rate today and enjoy tax-free withdrawals when you're in a higher bracket. 

Conversely, if you think that your withdrawals will be taxed at a lower tax rate when you retire, a traditional IRA could be an attractive choice. The idea here is to get the tax benefits when you're in a relatively high tax bracket and then make your withdrawals when your tax rate on withdrawals may be lower. 

If you think the tax rate you will pay on withdrawals will the same when you retire as your marginal income tax rate today, it's almost a wash for income tax purposes. 

That said, if you could use the tax break now, consider a traditional IRA or if you prefer the potential for tax-free growth and tax-free withdrawals choose a Roth IRA. There may be other reasons to consider a Roth, as we'll see below. 

Despite not offering an upfront tax deduction, a Roth IRA may be the more flexible option when it comes to managing your income and taxes in retirement because you can withdraw money without increasing your tax bill. That could come in handy if, for example, you had a large, one-time unexpected expense like a costly medical procedure or an expensive roof repair.   

Tax- and penalty-free withdrawals after age 59½, can make Roth IRAs a tempting option for your spending needs. However, just because you can hit your Roth savings doesn't mean you should, particularly if you're fairly young. Taking money out of your Roth IRA means you may miss out on the potential for compounding gains for retirement. And when you can put in only $7,000 ($8,000 if you're age 50 or older) yearly, it might be difficult to make up the amount you withdrew. 

Finally, should your tax rate increase in the future or when you retire, contributing to a Roth IRA can help you diversify your savings by tax treatment. This can provide a hedge – or protection against – for changes in tax law and the potential for higher future tax rates sometime down the road.

If you change jobs, you can convert a traditional 401(k) directly into a Roth IRA without having to roll it into a traditional IRA first. Just remember, you must pay federal income tax on the full amount in the year of the rollover. Also, you may have other choices, including keeping your assets in your former employer's plan, rolling over assets to your new employer's plan, rolling over assets to a new traditional IRA, or taking a cash distribution (on which taxes and possible withdrawal penalties may apply). 

An increasing number of employers offer Roth 401(k)s in addition to traditional 401(k)s. With a Roth 401(k), you can contribute a portion or all your paycheck up to certain limits. You can also choose to have some of your paycheck go pre-tax into a traditional 401(k) and some post-tax into a Roth 401(k).  

Unlike a Roth IRA, contributions to a Roth 401(k) aren't subject to earnings limits. So, if you aren't eligible to contribute to a Roth IRA because your income is too high, you may be able to contribute to a Roth 401(k). Also, just like a traditional 401(k), you can contribute more to a Roth 401(k) you can to a Roth IRA. In 2024, you can contribute up to $23,000 with a $7,500 catch-up contribution, while in 2025 you'll be able to contribute $23,500, plus a $7,500 catch-up.

Distributions from a Roth 401(k) are generally subject to the same tax rules as a Roth IRA. (The exception is that investors under age 59½ are allowed to take a $10,000 distribution from a Roth IRA penalty free if they are buying or building a first home.)

If you're ineligible for a Roth IRA because of income limits, some investors choose to make contributions to a traditional IRA and then later convert those contributions to a Roth IRA. 

High earners who aren't eligible to make Roth IRA contributions could make nondeductible—i.e., after-tax—contributions to a traditional IRA and then convert to a Roth (sometimes called a "backdoor Roth conversion"). However, the tax rules can be complex. 

For example, if you have traditional IRA assets in addition to your nondeductible IRA contribution, you may end up having to pay taxes on a part of your conversion, as the IRS looks at all your IRA assets for tax purposes. So, although you may think you're converting only those assets that have already been taxed into Roth assets—and therefore not subject to additional taxes—the IRS considers the conversion a mix of pre- and after-tax assets. And that means you'll have to pay taxes on the pre-tax portion. (The portion is based on the size of your traditional IRA assets relative to your nondeductible IRA assets.) 

Given that, making nondeductible contributions to a traditional IRA with the goal of later converting to a Roth IRA would generally be easiest if you have little or no existing pre-tax IRA balance to muddy the waters. And even then, any potential earnings you accumulate between the contribution and the conversion would be subject to income tax. We generally suggest that the tax be paid with other funds, not withdrawals from the IRA, to maximize the amount available to convert and contribute to the Roth account. 

Both traditional and Roth IRAs are great long-term savings tools, so educate yourself on the differences and make an informed decision that fits your retirement goals. If you expect tax rates in the future will rise, either because your wealth and income will be higher when you retire or a change in tax law, consider Roth accounts. Also, be sure to talk with your CPA or tax professional about whether a traditional or a Roth IRA—or both—makes sense for you.