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Roth IRA vs Traditional IRA. We break down the essentials, empowering your retirement decisions.

Roth IRA vs Traditional IRA: In-Depth Comparison

Disclaimer: This website and its content are for informational purposes only and is not financial advice.

The Core Difference: Tax Timing

At the heart of the traditional IRA versus Roth IRA debate lies the timing of your tax benefits. A traditional IRA generally allows you to contribute pre-tax dollars, meaning your contributions may be tax-deductible in the year they are made. This can lead to an immediate tax reduction, lowering your taxable income for that year.

Your investments within a traditional IRA grow tax-deferred, which means you won't pay taxes on the earnings until you withdraw the money in retirement. This "tax now, grow later" approach is a significant characteristic of the traditional IRA.

In contrast, a Roth IRA operates on an "after-tax" basis. You contribute money that has already been taxed, so your contributions are not tax-deductible in the present. The magic of the Roth IRA reveals itself in retirement: all qualified withdrawals, including your contributions and earnings, are entirely tax-free.

This means you pay your taxes upfront, and then enjoy tax-free income in your golden years. This difference in tax treatment is a primary consideration when weighing a traditional IRA against a Roth IRA.

Income and Future Tax Bracket Considerations

The question of which IRA is superior often depends on your current income and your anticipated tax bracket in retirement. If you believe you are currently in a higher tax bracket than you expect to be in retirement, the traditional IRA's upfront tax deduction may be more appealing.

This allows you to potentially save on taxes now, when your income is high, and pay taxes later when your income might be lower.

Conversely, if you foresee yourself in a higher tax bracket during retirement, or if you are in a relatively low tax bracket now, the Roth IRA's tax-free withdrawals in retirement could be a substantial advantage. Paying taxes now at a lower rate to enjoy tax-free growth and withdrawals later is a powerful benefit of the Roth IRA.

Contribution Limits and Eligibility

Contribution limits are generally the same for both traditional IRA and Roth IRA accounts. For 2025, individuals can contribute up to $7,000, and those age 50 and older can make an additional catch-up contribution of $1,000, bringing their total to $8,000.

However, eligibility to contribute to a Roth IRA is subject to income limitations. For 2025, if you are a single filer, your modified adjusted gross income (MAGI) must be under $150,000 to make a full Roth IRA contribution.

The ability to contribute phases out as your income rises, with a full exclusion at $165,000 or more. For those married filing jointly, the MAGI limit for a full Roth IRA contribution is under $236,000, with a phase-out range up to $246,000.

There are no income limits for contributing to a traditional IRA, although your ability to deduct contributions may be limited if you or your spouse are covered by a workplace retirement plan and your income exceeds certain thresholds.

Updated May 27th, 2025

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Withdrawal Rules and Flexibility

Withdrawal rules also vary significantly between a traditional IRA and a Roth IRA. With a traditional IRA, you generally must begin taking required minimum distributions (RMDs) once you reach age 73 (or 72 if you were born before July 1, 1949).

These RMDs are taxable as ordinary income. Failure to take your RMDs can result in hefty penalties. On the other hand, a Roth IRA has no required minimum distributions for the original account owner during their lifetime.

This offers immense flexibility, allowing your money to continue growing tax-free for as long as you wish, or even to be passed on to your heirs tax-free.

When it comes to early withdrawals before age 59½, both account types generally impose a 10% penalty, in addition to regular income taxes on the taxable portion of the withdrawal from a traditional IRA.

However, the Roth IRA offers a distinct advantage: you can withdraw your contributions (the money you put in) at any time, tax-free and penalty-free, regardless of your age.

This flexibility can provide a valuable emergency fund, though it's generally not advisable to dip into retirement savings unless absolutely necessary.

Withdrawals of earnings from a Roth IRA before age 59½ are typically subject to taxes and penalties unless certain exceptions are met, such as for a first-time home purchase or due to disability.

529 to Roth IRA Rollovers

Recent changes allow for limited rollovers from 529 college savings plans to Roth IRAs. Starting in 2024, unused 529 funds can be rolled into a Roth IRA, subject to certain conditions.

The 529 plan must have been open for at least 15 years, and the amount rolled over is limited to the Roth IRA annual contribution limit ($7,000 for 2025) minus any other Roth IRA contributions made that year.

There's also a lifetime maximum rollover limit of $35,000 per beneficiary. This offers a new avenue for unused education savings to contribute to retirement.

Making the Right Choice

Ultimately, the choice between a traditional IRA and a Roth IRA is a personal one, influenced by your current financial situation, your income trajectory, and your long-term tax outlook. Some individuals even choose to contribute to both a traditional IRA and a Roth IRA to gain tax diversification in retirement.

Consulting with a qualified financial advisor can help you navigate these complexities and determine which IRA, or combination of IRAs, is best suited for your unique retirement planning needs. Making an informed decision about your traditional IRA or Roth IRA can have a profound impact on your financial well-being in retirement.

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By Jordan McCaleb, Investment Researcher