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

When planning for retirement, Individual Retirement Accounts (IRAs) are among the most popular tools. But should you choose a Traditional IRA or a Roth IRA? Both offer tax advantages, yet they work very differently—and understanding those differences can help you make the best decision for your financial future.

What They Have in Common

• Contribution Limits: For 2025, you can contribute up to $7,000 across all IRAs combined, or $8,000 if you’re age 50 or older thanks to the catch-up provision.

• Deadline: Contributions for 2025 can be made until the April 2026 tax filing deadline.

• Investment Flexibility: Both allow you to invest in stocks, bonds, mutual funds, and other options within the account.

Key Differences Between Roth and Traditional IRAs

1. Tax Treatment

   • Traditional IRA: Contributions may be tax-deductible now, reducing your taxable income for the year. However, withdrawals in retirement are taxed as ordinary income.

   • Roth IRA: Contributions are made with after-tax dollars, so there’s no upfront deduction—but qualified withdrawals in retirement are tax-free.

2. Withdrawal Rules

   • Traditional IRA: Withdrawals before age 59½ generally incur taxes and a 10% penalty (with some exceptions). Required Minimum Distributions (RMDs) start at age 73.

   • Roth IRA: Contributions (not earnings) can be withdrawn anytime tax-free. Earnings can be withdrawn tax-free after age 59½ if the account is at least 5 years old. There are no RMDs during your lifetime.

3. Income Limits

   • Traditional IRA: Anyone with earned income can contribute, but deductibility phases out if you or your spouse have a workplace retirement plan and your income exceeds IRS limits.

   • Roth IRA: Contributions phase out at higher incomes. For 2025, you can make the full contribution if your MAGI is under $150,000 (single) or $236,000 (married filing jointly). Partial contributions are allowed up to $165,000 (single) and $246,000 (joint).

Which One Is Right for You?

Choosing between a traditional and Roth IRA depends on several key factors:

1. Current vs. Future Tax Rates

   The most important consideration is whether you expect to be in a higher or lower tax bracket in retirement. A traditional IRA provides an immediate tax deduction, which is valuable if you're currently in a high tax bracket. A Roth IRA offers no current deduction, but qualified distributions including earnings can be withdrawn tax-free in retirement.

2. Income Eligibility

   Traditional IRA deductions phase out at lower income levels if you're covered by an employer retirement plan. However, Roth IRA contributions phase out at higher income levels.

3. Required Minimum Distributions

   Traditional IRAs require you to begin distributions at age 73, while Roth IRAs have no required distributions during your lifetime. This makes Roth IRAs more flexible for estate planning.

4. Distribution Flexibility

   Roth IRA distributions come from your basis before taxable earnings, giving you more flexibility to access contributions without tax consequences. With a traditional IRA, any nondeductible basis must be mixed with all other funds, and the tax-free basis cannot be fully distributed until all funds in all traditional IRAs are depleted.

Bottom Line

If you need the current tax deduction and expect lower retirement income, choose a traditional IRA. If you can forgo the current deduction and want tax-free retirement income with no RMDs, choose a Roth IRA.

Both IRAs are powerful tools for retirement savings. The best choice depends on your current tax situation, future income expectations, and personal goals. If you’re unsure, consider consulting a financial advisor to tailor a strategy that works for you or contact us for more information.