Retirement

Comparing Roth IRA vs. Traditional IRA

Dayana Yochim

Written by Dayana Yochim
Edited by Carolyn Kimball
Fact-checked by Andrea Coombes

December 21, 2022

It’s all about taxes. And eligibility rules. And, well, a bunch of other stuff too. But we can boil down the Gordian knot of IRS tax code devoted to detailing the differences between Roth and traditional IRAs to a mere 23 words:

The main difference between Roth and traditional IRAs is how contributions (the money you put into the account) and distributions (withdrawals) are taxed.

Any follow-up questions? 😂

Back up! What the heck is an IRA?

IRA = individual retirement account, a tax-advantaged place to plop your long-term savings. See What Is an IRA: Pros and Cons for the deets. We’ll hold your place in line until you get back.

Assuming you still have a few lingering queries on the topic, we’ll kick off our more in-depth tour with an elevator pitch-length overview of your two main IRA options:

Option 1:

A traditional IRA provides an upfront tax break on contributions. Withdrawals from the account in retirement are taxed as income. The money you contribute to a traditional IRA may be deductible from the amount of income the IRS taxes. (We say “may be,” because, well, IRS rules. More on those below.) For example, if you make $75,000 and contribute $6,500 to a traditional IRA in 2023, your taxable income for the year will drop to $68,500.

The tax vacation ends when you start withdrawing money (aka “taking distributions”) from the account. At that point the IRS comes back into your life to collect what you avoided paying when you funded your account. Distributions from a traditional IRA are taxed as income at whatever tax bracket rate you’re in when you tap the account.

Option 2:

A Roth IRA provides tax-free withdrawals in retirement, but contributions to the account are not deductible. When you choose a Roth IRA you forgo the upfront income break offered in a traditional IRA. The IRS takes its cut off the top before you contribute money to the account. (Technically, you’re contributing post-tax dollars versus pre-tax dollars in a traditional IRA.) So, if you make $75,000 and contribute $6,500 to a Roth IRA in 2023, your taxable income won’t drop. However, that concludes your business with the IRS forever (on this matter, at least).

Because you settled your tax bill upfront, you will owe no income taxes on your Roth IRA withdrawals in retirement. Zip. Nada. Zilch.

Roth vs. Traditional IRA recap: The biggest difference between Roth and traditional IRAs is how the IRS treats your dollars before they go in and when they come out.

  • Wanna get the tax business out of the way now so you can enjoy tax-free withdrawals? Choose a Roth IRA.
  • Eager to snag an income tax break today and postpone your tax bill until you start taking distributions? Choose a traditional IRA.

Roth IRA vs. traditional IRA comparison

Here’s a quick side-by-side comparison of the inner workings of Roth and traditional IRAs before we figure out which one (or both!) best suits your needs now and in the future.

Roth IRA vs. Traditional IRA Comparison:

IRA features Traditional IRA Roth IRA
Contribution limits 2022: $6,000 ($7,000 if age 50 or older)
2023: $6,500 ($7,500 if age 50 and older)
2022: $6,000 ($7,000 if age 50 or older)
2023: $6,500 ($7,500 if age 50 and older)
Funding deadline (you have until the tax filing deadline to fund your IRA) Unless extended due to local state holiday:
2022: April 18, 2023
2023: April 15, 2024
Unless extended due to local state holiday:
2022: April 18, 2023
2023: April 15, 2024
Eligibility Anyone with earned income can contribute

Deductibility may be limited based on income and household access to a workplace retirement plan
Eligibility to contribute based on income
Taxes Contributions may be deductible

Investments grow tax-deferred

Withdrawals in retirement are taxed as income
Contributions are not deductible

Investments grow tax-free

Withdrawals in retirement are completely tax-free
Early withdrawals (before age 59½) Contributions and gains subject to a 10% early withdrawal penalty and income taxes

Penalty-free withdrawals are allowed for certain qualified expenses
Contributions can be withdrawn at any time penalty- and tax-free

Investment gains subject to an early withdrawal penalty, except in certain circumstances
Required minimum distributions (RMDs) Starting at age 72 you must begin to draw down from the account None. You can let your investments grow well into your dotage and beyond (for your heirs)
Special sauce If your income prohibits you from deducting your contributions, you’re allowed to fund a nondeductible IRA and enjoy tax-free investment growth while your money is in the account. Distributions of your contributions will not be taxed. Contributions (not earnings) can be withdrawn from a Roth IRA at any time for any reason without penalty. We prefer that you don’t, but if you must, it’s a handy perk.

Source: IRS.gov traditional IRAs and Roth IRAs

As you can see, Roth and traditional IRAs have a lot of overlap in account features. The main differences show up in eligibility requirements, how contributions and withdrawals are taxed, and what (if any) penalties and taxes you’ll pay if you withdraw money early.

What Roth and traditional IRAs have in common

Roth and traditional IRAs share a lot of the same DNA when it comes to account features and some basic rules, including:

  • Identical contribution limits. In 2023 the IRS allows savers to deposit as much as $6,500 in a Roth or traditional IRA (and up to $7,500 if you’re 50 or older). If you invest money in both a Roth and traditional IRA in the same year — because, yup, that’s allowed! — the total of your combined contributions cannot exceed the $6,500/$7,500 cap.
  • Investment earnings are not taxed. As long as the money remains in your Roth or traditional IRA, you don’t pay a dime in taxes on investment growth, even when you buy and sell investments within the account or any stocks spit out dividends.
  • Access to a variety of investments. What makes saving money in an IRA (both Roth and traditional) different than depositing cash into a bank account is that you’re able to invest in assets like mutual funds, stocks, bonds, and more. Don’t skip the important step of choosing investments or else the money in your IRA will remain in cash earning a pittance in interest.
  • Qualified withdrawals are allowed when you reach age 59½. Remember, IRAs are not meant to be used as a short-term parking spot for your savings. After you reach the age of 59½ you can start taking distributions. Distributions before that age may be subject to a 10% early withdrawal penalty and income taxes (although the IRS does waive the 10% additional tax in some circumstances).
  • You can set up a Roth IRA or traditional IRA at the financial institution of your choice. Every major brokerage firm offers IRAs and, almost without exception, they offer both Roth and traditional accounts. Account setup and funding is as simple as opening a bank account. (If you’re shopping for a provider, our sister site, StockBrokers.com, test-drove 17 of the top brokers to rank the best IRA accounts.)

How Roth and traditional IRAs are different

Although traditional and Roth IRAs share a lot of the same traits, as we said earlier, the biggest difference is how the IRS treats your dollars before they go in and when they come out. But those aren’t the only areas of divergence.

The biggest difference between a Roth IRA and a traditional IRA is how the IRS treats your dollars before they go in and when they come out.

Eligibility rules are different

Traditional IRA eligibility/contribution rules: Everyone who reports earned income to the IRS — up to any limit — is allowed to fully fund a traditional IRA up to the maximum contribution limit set by the IRS each year. Please hold your applause, because there’s a catch: Not everyone is eligible to deduct the full (or even any) amount of their contribution from their income taxes and get that upfront tax break. Your deduction is based on your income combined with other factors. (See the deductibility tables at the end of this article for details.)

Roth IRA eligibility/contribution rules: Unlike the traditional IRA, not every taxpayer can fund a Roth IRA. Eligibility comes down to your income. At certain income levels, the IRS starts phasing out the amount you’re allowed to contribute to a Roth IRA. Eventually (for singles with a modified adjusted gross income of $153,000 or more and marrieds making $228,000 and up), the option is completely eliminated. (See the Roth IRA contribution limits table below.)

Contributions are taxed (or not taxed) differently

Traditional IRA: Contributions to a traditional IRA may be deductible from your taxes, thus reducing your taxable income for the year. The deduction amount is based on your income, tax filing status, and whether you (or a spouse, if filing jointly) have access to a workplace retirement plan such as a 401(k) or 403(b). Even if you don’t save in your workplace account, the mere fact that you have the option to can impact how much of your traditional IRA contribution the IRS lets you deduct once you reach certain income levels. (See the deduction tables below to see how you might be impacted.)

Roth IRA: Roth contributions offer no upfront tax deduction. This is one reason why the Roth is often the choice for savers in lower tax brackets. Instead of taking an upfront tax deduction with a traditional IRA, the Roth IRA allows you to dodge income taxes in future flusher years when the “get-out-of-tax-jail-free” savings will have a bigger impact.

Withdrawals are taxed (or not taxed) differently

Traditional IRA: Withdrawals from a traditional IRA after age 59½ are subject to income taxes because, remember, you avoided paying them on the money you contributed to the account (if you qualified for the deduction). The IRS calculates the amount due based on the tax bracket you’re in when you take the distribution. If you’re in a higher tax bracket while working, postponing paying taxes may be worth more to you in the future when you’re bringing in less income and, thus, find yourself in a lower tax bracket.

Roth IRA: Because you paid your tax bill upfront (when you funded the account with after-tax dollars), your withdrawals from a Roth IRA after age 59½ are completely tax-free.

investor.com Quick Tip: Need the money early? Choose a Roth IRA

First, a mandatory disclaimer: Retirement savings should be saved for retirement. But, if you absolutely must break the glass to access cash from an IRA for an emergency, the Roth is your best option.

Roth IRAs allow you to withdraw your contributions without penalty at any time and for any reason. The key word is c-o-n-t-r-i-b-u-t-i-o-n-s. Touch earnings, and you’ll get a nasty surprise — a 10% early withdrawal penalty.

Note: This is a Roth IRA-only perk. In all but a few circumstances, early withdrawals (before age 59½) from a traditional IRA are subject to taxes and a 10% penalty.

One other note on withdrawals: Traditional IRAs require savers to start withdrawing money in the year the account holder turns 72. So ageist, right? These required minimum distributions (RMD) — whether you need the money or not — are taxable as income. Roth IRAs do not require you to take RMDs. You can leave the money in the account to collect investment gains for the rest of your life and brag about tax-free investment growth to anyone in the afterlife willing to listen.

How to choose between a Roth and traditional IRA

The biggest secret-that’s-not-a-secret about choosing between a Roth and traditional IRA is this: You may not have to choose! If you qualify to contribute to both types of IRAs, you’re allowed to save money in each at the same time.

The IRS allows savers to contribute to both a Roth and traditional IRA in the same year, as long as the total of your combined contributions does not exceed the annual limit. In other words, if you’re eligible to contribute the maximum to a traditional and Roth IRA in 2023, you’ve got $6,500 (or $7,500 if you’re 50 or older) to split between the two IRA types however you’d like.

The IRS allows savers to contribute to both a Roth and traditional IRA in the same year, as long as the total of your combined contributions does not exceed the annual limit.

You may not want to — or be eligible to — contribute to both types of IRAs, however. In that case the following questions can help you decide the best IRA option for your situation.

What type of IRA do I qualify for?

Eligibility is the biggest issue in the Roth vs. traditional IRA question. It’s based on a few key pieces of information:

  • With a Roth IRA you need to see how your income (specifically, your modified adjusted gross income, or MAGI) affects the amount you’re allowed to contribute.
  • With a traditional IRA your income, tax filing status, and whether you’re covered by a workplace retirement plan determines the amount of your contribution you’re allowed to deduct.

Next, let’s see how these numbers affect your eligibility, starting with the Roth IRA.

Do you qualify to contribute to a Roth?

Not everyone is eligible to max out — let alone contribute anything to — a Roth IRA. Contribution limits are based on your income.

The amount you’re allowed to contribute to a Roth IRA in 2023 starts to phase out when your modified adjusted gross income hits $138,000 if you’re a single filer, or $218,000 if you’re married filing jointly. Here’s the breakdown, courtesy of the Internal Revenue Service:

2022/2023 Roth IRA contribution limits based on income

If your tax filing status is… and your modified AGI is… then you can take…
married filing jointly or qualifying widow(er) 2022: less than $204,000
2023: less than $218,000
up to the limit
married filing jointly or qualifying widow(er) 2022: between $204,000 and $214,000
2023: between $218,000 and $228,000
a reduced amount
married filing jointly or qualifying widow(er) 2022: $214,000 or more
2023: $228,000 or more
zero
married filing separately and you lived with your spouse at any time during the year 2022: less than $10,000
2023: less than $10,000
a reduced amount
married filing separately and you lived with your spouse at any time during the year 2022: $10,000 or more
2023: $10,000 or more
zero
single, head of household, or married filing separately and you did not live with your spouse at any time during the year 2022: less than $129,000
2023: less than $138,000
up to the limit
single, head of household, or married filing separately and you did not live with your spouse at any time during the year 2022: between $129,000 and $144,000
2023: between $138,000 and $153,000
a reduced amount
single, head of household, or married filing separately and you did not live with your spouse at any time during the year 2022: $144,000
2023: $153,000 or more
zero

Source: IRS.gov Roth contribution limits for 2022 and 2023

How much of a traditional IRA deduction are you allowed to take?

As we said earlier, everyone with earned income is allowed to contribute to a traditional IRA. The deciding factor for many is how much of that contribution you’re allowed to deduct from your income.

If you (and your spouse, if married) do not have access to a retirement plan at work, congratulations: You get to take the full deduction! Otherwise, deductibility of traditional IRA contributions are based on your tax filing status, modified adjusted gross income, and availability of a workplace retirement plan. Below is the official rundown of how these factors affect IRA deductibility from our friends at the IRS, starting with the rules if you have access to a workplace retirement plan, such as a 401(k), 403(b) or 457 plan:

2022/2023 traditional IRA deduction limits if you ARE covered by a workplace retirement plan

If your tax filing status is… and your modified AGI is… then you can take…
single or head of household 2022: $68,000 or less
2023: $73,000 or less
a full deduction up to the amount of your contribution limit
single or head of household 2022: more than $68,000 but less than $78,000
2023: more than $73,000 but less than $83,000
a partial deduction
Spousal IRA (Roth or traditional) 2022: $6,000 (or $7,000 if age 50 or older)
2023: $6,500 (or $7,500 if age 50 or older)
Nonworking spouse can contribute same amount as the household wage earner is allowed. Total combined IRA contributions cannot exceed taxable compensation reported on your joint return.
single or head of household 2022: $78,000 or more
2023: $83,000 or more
no deduction
married filing jointly or qualifying widow(er) 2022: $109,000 or less
2023: $116,000 or less
a full deduction up to the amount of your contribution limit
married filing jointly or qualifying widow(er) 2022: more than $109,000 but less than $129,000
2023: more than $116,000 but less than $136,000
a partial deduction
married filing jointly or qualifying widow(er) 2022: $129,000 or more
2023: $136,000 or more
no deduction
married filing separately 2022 and 2023: less than $10,000 a partial deduction
married filing separately 2022 and 2023: $10,000 or more no deduction

Source: IRS.gov IRA deduction rules if you are covered by a retirement plan at work (2022 and 2023)

Here are the income levels if you do not have a workplace plan, but your spouse does. Remember, if neither of you has a workplace plan, there’s no income limit.

2022/2023 traditional IRA deduction limits if you are NOT COVERED by a workplace retirement plan

If your tax filing status is… and your modified AGI is… then you can take…
single, head of household, or qualifying widow(er) 2022 and 2023: any amount a full deduction up to the amount of your contribution limit
married filing jointly or separately with a spouse who is not covered by a plan at work 2022 and 2023: any amount a full deduction up to the amount of your contribution limit
married filing jointly with a spouse who is covered by a plan at work 2022: $204,000 or less
2023: $218,000 or less
a full deduction up to the amount of your contribution limit
married filing jointly with a spouse who is covered by a plan at work 2022: more than $204,000 but less than $214,000
2023: more than $218,000 but less than $228,000
a partial deduction
married filing jointly with a spouse who is covered by a plan at work 2022: $214,000 or more
2023: $228,000 or more
no deduction
married filing separately with a spouse who is covered by a plan at work 2022 and 2023: less than $10,000 a partial deduction
married filing separately with a spouse who is covered by a plan at work 2022 and 2023: $10,000 or more no deduction

Source: IRS.gov IRA deduction rules if you (or a spouse) is not covered by a workplace retirement plan (2022 and 2023)

When is the tax break most valuable to you?

Picking an IRA type requires being a bit of a tax-rate soothsayer. Will you be in a higher tax bracket later, where the tax-free withdrawals from a Roth will be more valuable? Or will your income be lower in the future than it is now, making the upfront deduction of a traditional IRA more financially meaningful? And then there’s the question of any tax law changes the IRS might make between now and when you start taking IRA distributions.

As we noted above:

  • If you expect to be in a higher tax bracket in the future, choose a Roth IRA to enable you to take tax-free withdrawals.
  • If you’re in your peak earning years now, choose a traditional IRA to minimize your current tax liability and postpone your tax bill until later when you’re in a lower tax bracket.

Since no one’s powers of prediction are perfect, just remember this: Don’t stress out too much about this decision; the most important thing is to start saving for retirement somewhere. A tax break now or later is still a tax break.

Don’t stress out too much about this decision; the most important thing is to start saving for retirement somewhere. A tax break now or later is still a tax break.

Do you have access to a Roth 401(k) option at work?

Like IRAs, workplace retirement plans (401(k)s, 403(b)s, etc.) come in Roth and traditional flavors. But employers are not required to offer Roth retirement plans, so not all do. (They are more common in plans offered by larger companies.) See What is a 401(k): Pros and Cons for more on how these plans work.

If your workplace retirement plan includes a Roth option, like a Roth 401(k) or Roth 403(b), the Roth vs. traditional IRA question just got a lot less onerous if you’re in either of these situations:

  • If you’re ineligible to contribute fully to a Roth IRA, take advantage of tax-free growth in your workplace plan: Income isn’t a factor in eligibility for workplace Roth plans like it is with the Roth IRA. As they say, when one door shuts, look for an open Roth window. (It’s possible we just totally bungled that old saying.) In this scenario it makes sense to direct additional retirement savings dollars above and beyond what you save in a 401(k) into a traditional IRA.
  • If you don’t qualify for a full upfront tax deduction on your traditional IRA contribution, take advantage of the tax-deferred contributions in your workplace plan: The classic 401(k) plan works like a traditional IRA: Contributions reduce your taxable income and withdrawals are taxed as income in retirement. Here, too, income doesn’t affect the tax break you get on contributing to a 401(k) like it does in a traditional IRA. Plus, in a 401(k) you’ll get an even bigger upfront tax break thanks to the high contribution limits (up to $22,500, or $30,000 if you’re 50 or over).

For more on deciding whether to invest in a 401(k) or an IRA, see IRA vs 401(k): The Best Way to Use Each Account.

Do you need access to the money before retirement?

If you think you’ll need to tap into your savings early (which the IRS defines as before age 59½), choose a Roth IRA. You’re allowed to withdraw your Roth IRA contributions (not earnings!) at any time without having to pay income taxes or a 10% early withdrawal penalty.

The penalty- and tax-free early withdrawal option is not offered in a traditional IRA. Accessing any money from a traditional IRA before age 59½ — be it contributions or earnings — will result in a 10% early withdrawal penalty on top of the income taxes you’ll owe on the amount of the distribution. That said, the IRS isn’t a total heartless monster about early distributions. There are circumstances where the 10% penalty is waived on early withdrawals (for instance, medical hardships, qualified higher education expenses, first-time home purchase), but just the penalty, not the taxes.

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IRA vs. 401(k): The Best Way to Use Each Account

About the Editorial Team

Dayana Yochim
Dayana Yochim

Dayana Yochim has been writing (articles, books, podcasts, stirring speeches) about personal finance and investing for more than two decades, focusing on bringing clarity and the occasional comedic aside to what is often a murky, humorless topic. She’s written for NerdWallet, The Motley Fool, HerMoney.com, Woman’s Day, Forbes, Newsweek and others, and been a guest expert on "Today," "Good Morning America," CNN, NPR and wherever they’ll hand her a mic.


Carolyn Kimball
Carolyn Kimball

Carolyn Kimball is Managing Editor for Reink Media Group and the lead editor for content on investor.com. Carolyn has more than 20 years of writing and editing experience at major media outlets including NerdWallet, the Los Angeles Times and the San Jose Mercury News. She specializes in coverage of personal financial products and services, wielding her editing skills to clarify complex (some might say befuddling) topics to help consumers make informed decisions about their money


Andrea Coombes
Andrea Coombes

Andrea Coombes has 20+ years of experience helping people reach their financial goals. Her personal finance articles have appeared in the Wall Street Journal, USA Today, MarketWatch, Forbes, and other publications, and she's shared her expertise on CBS, NPR, "Marketplace," and more. She's been a financial coach and certified consumer credit counselor, and is working on becoming a Certified Financial Planner. She knows that owning pets isn't necessarily the best financial decision; her dog and two cats would argue this point.


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