Roth IRA vs. Traditional IRA: What’s the Difference?

An individual retirement account (IRA) can be a good way to boost your retirement savings. Unlike a 401(k), an IRA gives you flexibility over how you invest your money. This gives you the chance to benefit from market fluctuations or diversify your portfolio — boosting your returns.

There are different types of IRAs you can open. A traditional IRA is similar to a 401(k), but with the flexibility to choose what you invest in. A Roth IRA, on the other hand, is a special type of IRA that comes with different tax benefits.

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What Are Traditional and Roth IRAs?

Traditional and Roth IRAs are both retirement accounts.

Unlike an employer-sponsored 401(k), which usually offers pre-picked funds to invest in, both traditional and Roth IRAs offer greater flexibility and give you access to a variety of different securities. 

This allows you to allocate your assets according to your preferences and diversify your portfolio to reduce risk.

• A traditional IRA is a tax-deferred retirement account. This means you don’t pay taxes on the income you use to contribute to your account. However, you will pay taxes when you withdraw the money in retirement.

• A Roth IRA is a tax-benefited retirement account. You pay income tax on the money before you invest it. Since you’ve already paid tax, you then don’t pay tax on it when you withdraw in retirement.

READ MORE: Why Asset Allocation Is Essential for Investing

How Traditional and Roth IRAs Are the Same

Traditional and Roth IRAs have the same contribution limits. For 2024:

• If you’re under the age of 50, you can contribute $7,000 to an IRA. 
• If you’re older than 50, you can contribute $8,000. 

The limit applies to the combined contribution to both accounts. That means you can contribute to both a traditional and Roth IRA at the same time, but your total contributions cannot exceed the annual limit.

Both accounts come with the same penalty for early withdrawals. If you need to cash out your account before age 59½ you’ll be expected to pay a 10% penalty on your withdrawal as well as income taxes. 

The Roth IRA offers a bit more flexibility than a traditional IRA, but in general, you can expect to pay penalties if you tap into your funds early.

Finally, traditional and Roth IRAs qualify for the same protections under bankruptcy. If you file for bankruptcy, the Bankruptcy Abuse Prevention and Consumer Protection Act protects IRAs up to $1 million. That means a creditor won’t be able to claim your retirement savings.

That said, traditional and Roth IRAs are considered non-qualified accounts under the Employee Retirement Income Security Act. They typically won’t come with the same protections as other retirement accounts, like 401(k)s, and protection from creditors varies by state.

How Traditional and Roth IRAs Are Different

There are several ways that Roth and traditional IRAs differ, including who is eligible and how they’re taxed.

	Traditional IRA	Roth IRA
Contribution Limit	For 2024, the limit is $7,000 for individuals under age 50 and $8,000 for individuals 50 or older	For 2024, the limit is $7,000 for individuals under age 50 and $8,000 for individuals 50 or older
Eligibility	Anyone who earns an income	Single filers who earn less than $153,000 per year and married couples who file jointly and earn less than $228,000 per year
Tax Benefit	Contributions can be made using pre-tax dollars and are deductible in the year they are made	Capital gains appreciate tax-free and withdrawals will not incur income taxes
Tax Disadvantages	Withdrawals are required after age 73 and are taxed as ordinary income	Not eligible for deductions
Early Withdrawal	Withdrawals on earnings made before age 59½ are taxed as ordinary income and charged a 10% penalty; withdrawals on original contributions can be made at any time without penalty	Withdrawals on earnings made before age 59½ are taxed as ordinary income and charged a 10% penalty

Taxes on contributions

One of the biggest differences between a traditional IRA and a Roth IRA is how they are taxed. 

A traditional IRA allows you to invest using pre-tax dollars — meaning interest and earnings accrue tax-free. 

With traditional IRAs, you’re able to deduct your contributions from your income in the year they’re made. For example, if you make $50,000 a year and save $5,000 in your traditional IRA, you can deduct your contribution — leaving you with $45,000 of taxable income to report. 

There are some exceptions to the deduction limit if you’re covered by an employer-sponsored plan, but in most cases, a traditional IRA provides an immediate benefit and can help lower your tax bill.

Roth IRA contributions are made using post-tax dollars. That means you pay taxes upfront before you invest it. Any interest or earnings generated are yours to keep tax-free. 

The contributions you make in a Roth IRA don’t qualify for an immediate tax break like with a traditional IRA.

READ MORE: How Do Taxes Work?

Taxes in retirement

Traditional and Roth IRAs differ in how they’re taxed during retirement as well. 

Traditional IRA withdrawals are taxed as ordinary income, while withdrawals made from a Roth IRA are not. 

This is important to consider, especially if you think you might retire in a high tax bracket. For Roth IRAs, any withdrawals you make after age 59½ are tax-free. During the time you invest in your Roth IRA, any growth from your investments is also earned tax-free. 

For example, if you invest $100,000 into a Roth IRA and it grows to be $400,000 by the time you retire, the $300,000 capital appreciation you earned in the account is yours to keep tax-free. 

Minimum distributions

Another key difference is the required minimum distribution. 

A Roth IRA does not require you to withdraw money from your account. You can even keep your Roth IRA and pass it down as part of your estate.

A traditional IRA requires you to take minimum distributions beginning at age 73. The distribution amount is based on your life expectancy. As you get older, the annual distribution requirement will increase. 

These distributions are taxed as ordinary income, which can eat away at your earnings over time, especially if you find yourself in a higher tax bracket than you initially anticipated.

Eligibility

While both traditional IRAs and Roth IRAs have contribution limits, Roth IRAs also have eligibility limitations. 

High-income earners are not eligible to make contributions to a Roth IRA. If you are a single tax filer and earn more than $153,000 per year or you’re a married couple filing jointly and earn more than $228,000 per year, you won’t be able to make any contributions.

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When to Choose a Traditional IRA

A traditional IRA can be good for your current tax strategy. Depending on the tax bracket you’re in, taking advantage of the contribution deduction can help you reduce your taxable income.

It can also be a good option if you think you’ll be in a lower tax bracket when you retire. That allows you to benefit from the immediate tax benefits now while anticipating paying lower income taxes in the future.

Finally, a traditional IRA might be necessary if you’re currently in a high tax bracket. Your income level could make you ineligible for a Roth IRA — making a traditional IRA the only available option.

When to Choose a Roth IRA

Choosing a Roth IRA is a good option if you want to avoid paying taxes later in life and want to capitalize on growth as early as possible.

One of the best benefits of a Roth IRA is that your savings grow tax-free. Regardless of how much your portfolio grows in value, when you’re ready to retire, you can tap into your capital gains without paying taxes on it.

Another reason to choose a Roth IRA is if you think you’ll need to access your cash for an emergency. When you withdraw early from a traditional IRA, you’ll be hit with a 10% penalty, in addition to paying income taxes on your withdrawal. 

While that is true for any gains you earn in your Roth IRA, that isn’t the case for your principal contribution. If you deposit $10,000 into a Roth IRA account, that $10,000 is yours to withdraw at any time without penalty.

Finally, a Roth IRA doesn’t come with required minimum distributions and is yours to keep indefinitely. If you don’t tap into your funds when you retire, you can pass your Roth IRA down as part of your estate. 

This can be a great tool for building generational wealth if that is important to you.

READ MORE: How Much You Need to Retire

FAQs

Can I have both a traditional and a Roth IRA?

Yes, you can have both a traditional and a Roth IRA. For 2024, if you’re under the age of 50, you can contribute $7,000 to an IRA. If you’re over 50, you can contribute $8,000. 

If you plan to maintain both a traditional and a Roth IRA, you’ll need to make sure you’re eligible and that you follow these contribution limits.

Is it better to have a traditional or a Roth IRA?

Whether it’s better to have a traditional or Roth IRA comes down to your personal goals. 

If reducing your tax bill is important to you, then you will want to choose an account that helps you do that. A Roth IRA might be more beneficial if you want to build capital in the long term.

TL;DR

If you decide to open an IRA to save for retirement, you have two options: a traditional IRA or a Roth IRA.

A traditional IRA is ideal if you want to take advantage of the tax benefits now, or if you’re in too high of a tax bracket right now to qualify for a Roth IRA.

A Roth IRA is better if you’d rather get the tax benefits in retirement, such as if you expect to retire in a higher tax bracket than you are now.

Which one you choose depends entirely on your goals, but either way, it’s a smart move to start investing in your future today!

For more tips on investing and saving for retirement, check out these episodes of the Erika Taught Me podcast:

• How To Invest for Beginners (Step by Step)
• Do THIS To Become A Millionaire
• Why The Rich Get Richer

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