What is the difference between a Roth IRA and a Traditional IRA?

A Roth IRA and a Traditional IRA both help you save for retirement, but there is a difference in how you pay taxes and when you can withdraw money.
Here is a breakdown of the differences between a Roth IRA and a Traditional IRA:

Tax Treatment

• Roth IRA: Contributions are made with after-tax dollars (meaning you don’t get a tax deduction now), but withdrawals in retirement are tax-free.
• Traditional IRA: Contributions are tax-deductible (if you meet income requirements), but withdrawals in retirement are taxed as ordinary income.

Withdrawal Rules

• Roth IRA: You can withdraw your contributions anytime without taxes or penalties. If you’re at least 59½ and have had the account for five years or longer, you can also withdraw earnings tax-free.
• Traditional IRA: If you withdraw funds before turning 59½, you may face a 10% early withdrawal penalty and income taxes. After you turn 59½, you can withdraw funds without penalties, but it will taxed as income.

Required Minimum Distributions (RMDs)

• Roth IRA: No RMDs during your lifetime. You can let your money grow tax-free indefinitely.
• Traditional IRA: You must start taking RMDs at age 73 (as of 2023), which means you have to withdraw a certain amount each year and pay taxes on it.

Income Limits for Contributions

• Roth IRA: There are income limits that restrict who can contribute. In 2024, for example:
  •  If you’re single, your modified adjusted gross income (MAGI) must be below $161,000 to contribute fully.
  • If married filing jointly, MAGI must be below $240,000 to contribute fully.
• Traditional IRA: No income limits for contributions, but the ability to deduct contributions depends on your income and whether you have a workplace retirement plan.

Best for…

• Roth IRA: Ideal if you expect your tax rate to be higher in retirement or want tax-free withdrawals.
• Traditional IRA: Better if you want a tax break now and expect your tax rate to be lower in retirement.

 

Summary

Features	Roth IRA	Traditional IRA
Tax Treatment (Now)	Contributions are after-tax	Contributions are pre-tax (tax-deductible)
Tax Treatment (Later)	Withdrawals are tax-free	Withdrawals are taxed as income
Early Withdrawals	Contributions anytime; earnings after 59½ & 5 years	10% penalty before 59½, plus taxes
Required minimum distributions	None during your lifetime	Start at age 73
Income Limits	Yes (for contributions)	No (for contributions, but deductions may be limited)

 

Need more information?  the IRS is a good recourse