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Traditional vs. Roth IRA

Roth IRA vs Traditional IRA

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Catherine Hiles
Updated November 13, 2022
5 Min Read

When it comes to retirement savings, there are several options out there. Many employers offer a 401(k) where they will match your contributions up to a certain percentage. But if you don’t have a 401(k) available or want to have more than one type of retirement account, an individual retirement account, or IRA, is an excellent option.

When you’re researching IRAs to see which is right for you, you’ll come across a couple of options: Traditional or Roth. But what is the difference between the two, and what are the pros and cons of each?

Traditional vs. Roth IRA

Both types of IRA are good choices for your retirement savings, though they have some key differences that you should consider before deciding which type of account to open.


Similarly to a 401(k), an IRA allows you to save for retirement by investing money in a variety of stocks, bonds, and funds. Both traditional and Roth IRAs have tax advantages, but each type handles taxes slightly differently.

With a traditional IRA, the money you invest is tax-deductible. That means that if you invest $5,000, your taxable income decreases by that amount. That may help you qualify for certain tax deductions that you might otherwise miss out on.

Because the money isn’t taxed up-front in a traditional IRA, you will have to pay taxes on it when you withdraw the money upon retirement. That could work out for your tax bracket is the same or lower when you retire, but if you’re in a higher tax bracket you could end up paying a lot more in taxes on that money.

The money you put into a Roth IRA is not tax deductible, meaning it is taxed before you invest. The money you earn from your investments is not taxed. When you withdraw the money upon retirement, you will not be taxed since you already paid tax on that money. That means you’ll pay taxes based on your current tax bracket rather than your future one.


If you’re nearing retirement, you might be tempted to put any and all disposable income into your IRA to maximize your retirement savings. But the IRS has limits on how much you can contribute each year. That limit may change from year to year, so it’s always a good idea to check (and then max out your contributions if you are able).

For the 2021 tax year, the contribution limit is $6,000 for those under 50 years, and $7,000 for those 50 years or older. That contribution limit remained the same from the 2020 tax year.

For either IRA type, the deadline for making contributions is usually April 15 of the following year. 

You can choose to open both a traditional and a Roth IRA (or multiple), but your contribution limit will be shared. So you can contribute a total of either $6,000 or $7,000 (depending on age) split however you choose between your different IRAs.

Income limitations

While anyone can contribute to an IRA, there are certain limitations on income to be aware of. 

Traditional IRAs do not restrict your contributions based on your income. But your contributions can’t exceed the amount of income you earned that year. 

Roth IRAs have the same rule about contributions not exceeding income, but have another income-based caveat that may change how much you can invest. If you make more than a certain amount of income, your contributions may be phased out.

In 2021, the phase-out range is between $125,000 and $140,000 for a single tax filer. That range increases to $198,000-$208,000 if you’re married, filing jointly. 

With both ranges, once you hit the upper limit, you will no longer be able to contribute to a Roth IRA. When your income falls between the two, you can still contribute, but it’ll be a reduced amount. If your income is less than the lowest number, you’ll be able to contribute the full amount allowed by the IRS in the given tax year.


With a traditional IRA, you will pay income taxes when you withdraw money. That includes your original pre-tax contributions and your earnings on that money. Depending on your tax bracket at retirement, you may end up paying less or more than if you invested post-tax dollars in a Roth IRA. 

Traditional IRAs also require you to take your first required minimum distribution, or RMA, before April 1 the year following your 72nd birthday. From there, you will have to take an RMD each year by Dec. 31, though you do have the option of choosing installments or a one-time payment each year. The amount of your RMA is determined by your age and how much you have in your account. That information is available from the IRS.

With a Roth IRA there are no RMDs, so you can hold off on withdrawing the money if you don’t need it before (or after) age 72.

If you withdraw the money from your traditional IRA before you turn 59½, you will have to pay a 10% penalty. There are a few exceptions to that, listed below.

  • Paying for higher education for yourself or your immediate family - You can withdraw unlimited funds, penalty-free, to pay for tuition, fees, and supplies including books
  • Buying a home - You can withdraw up to $10,000 penalty-free to help with the purchase of your first home
  • Costs associated with a new child - You can withdraw up to $5,000 penalty-free within a year of the birth or adoption of your child
  • Paying for medical expenses including health insurance deductibles - You can withdraw up to 7.5% of your adjusted gross income penalty-free to pay for medical expenses not covered by insurance when you are unemployed.
  • Substantially equal payments - You can request to withdraw funds penalty-free for a period of five years before you turn 59½, the caveat being that the withdrawal amount is set by the IRS. If you quit this plan before its end date you will be required to pay the penalty on all funds withdrawn.
  • Qualified reservist distribution - If you are a member of the military reserves and are called to active duty for more than 179 days, you can withdraw funds penalty-free from your traditional IRA during that period 
  • If you die or become permanently disabled - In either circumstance, you or your beneficiary will be able to withdraw money from your traditional IRA with no penalty, even if you are younger than 59½ 

Since you already paid taxes on the money you invested in a Roth IRA, you will not need to pay any at the time of withdrawal. But depending on when you withdraw the money, you may have to pay taxes on your earnings. If you wait until after you turn 59½, you won’t be taxed on your Roth IRA earnings. If you withdraw before that age, you will have to pay taxes, as well as a 10% early withdrawal penalty, on your earnings (but no taxes or penalty on your original contributions).

There is also a five-year holding period for Roth IRAs, so if you do any of the following close to the time you turn 59½ you may need to wait a little longer to withdraw your earnings tax-free:

Pros and cons of each

The type of IRA you choose depends on your personal situation. There are several pros and cons of each type of IRA to consider before signing up.

Traditional IRA

Tax-deductible contributions can decrease your taxable income
You’ll need to pay taxes on contributions and earnings upon withdrawal
No income limitations means you can contribute no matter how much income you generate
Early withdrawal comes with a 10% penalty on top of taxes
You can withdraw funds early with no penalties under certain circumstances
You’re required to start taking an RMD when you turn 72, and must take one each year after that

Roth IRA

No taxes on contributions or earnings upon withdrawal
Roth IRA contributions won’t reduce your taxable income
Can withdraw contributions at any time without paying a penalty
If your earnings are high you may not be able to contribute
No rules on when you have to start withdrawing distributions
Early withdrawal of earnings comes with a 10% penalty plus income taxes


Both traditional and Roth IRAs are good options for retirement, but they have several key differences that will likely make you lean toward one over the other. Make sure you know the pros and cons of each so you can make an informed decision about how to save for retirement.