Roth vs. traditional IRA: Learn key differences and how to choose

Traditional IRAs and Roth IRAs are two of the most popular ways to save for retirement. Both can bolster your savings with earnings that compound over time and tax advantages you can leverage now or in the future. But when choosing between a Roth vs. Traditional IRA, how do you know which is best for you?

To make the best choice you need to understand how each works, the differences between them, and how their features support your overall financial picture and goals.

Retirement accounts are designed to help you save for your future in a tax-advantaged way. You save over a lifetime and when you're retired and no longer working, you can withdraw from the account. All IRAs share similarities, but each type has features that appeal to different savings strategies.

IRA stands for individual retirement account. What sets IRAs apart from other workplace-based retirement plans like 401(k)s, 403(b)s or pensions is that you can open them on your own. You don't need to have an employer to save with an IRA, although you only can contribute earned income.

Roth and traditional IRAs are two overarching types of IRAs that refer to how taxation works for the account. There are several kinds of IRAs that come in traditional and Roth varieties:

• SEP IRA: If you are self-employed and saving for retirement, you may have the option to open a Simplified Employee Pension.
• SIMPLE IRA: If you operate or work for a business with fewer than 100 employees, you may be able to save with a Savings Incentive Match Plan for Employees (SIMPLE) IRA.
• Inherited IRA: This is an IRA that someone receives due to the death of the account owner. You cannot contribute to an inherited IRA, and there are unique rules that guide withdrawals.
• Rollover IRA: A rollover IRA is one that you fund by transferring money from an employer-sponsored retirement plan.
• Spousal IRA: This is a Roth or traditional IRA established for a nonworking spouse.
• Custodial IRA: The parent or guardian of a minor with earned income can open a custodial retirement account for the minor to start saving for their future.

Traditional and Roth IRAs share the same basic characteristics as accounts that help people save money for retirement. They have the same annual contribution limits in 2025, and you can put in up to $7,000 if you're younger than 50 or up to $8,000 if you're 50 or older.

Where they differ is their tax treatments, who can contribute to them and how withdrawals in retirement work. Here are the key differences between traditional and Roth IRAs:

A simple but significant difference is the way taxes apply to traditional and Roth IRAs. Both shield the interest, dividends and capital gains you earn as long as your money stays in the account. The difference lies in whether you receive the tax benefit during the year you make the contribution or when you make the withdrawals.

• You generally can deduct your contributions to a traditional IRA, reducing your tax liability during the year you make contributions. Your money grows on a tax-deferred basis, and withdrawals are taxable.
  
• With Roth IRAs, you get tax deductionsduring the year you make withdrawals. This includes withdrawals of any investment growth.

The main thing to consider here is whether you believe your current or future tax rate will be higher. If your current tax rate is higher, a traditional IRA makes more sense. If you expect to be in a higher tax bracket during retirement, then a Roth may be a better choice.

Anyone with enough earned income can save up to the annual contribution limit in a traditional IRA, but that's not the case with Roth IRAs. If your income is too high, you may not be able to contribute the full amount or at all to a Roth account. Earners who are in between the lower and upper limits can contribute a reduced amount, but if you make more than the upper limit, you have to explore other options besides a Roth.

2025 Roth IRA income limits

One thing to note is that although the amount you earn doesn't affect how much you can contribute to a traditional IRA, it may affect whether you are able to claim a deduction for your contributions.It depends on how much you make and whether you or your spouse are covered by a retirement plan through your job.

Both traditional and Roth IRAs offer tax advantages if you wait until you reach age 59½ before you withdraw money from the account. Early withdrawals can result in a 10% penalty in addition to any income tax you may owe on what you take out, unless you qualify for an exception. Due to how the tax advantages for traditional vs. Roth IRAs work, however, a key difference is whether or not you have to start taking money out by a certain age.

Because all the money in the account is tax-deferred, a 10% penalty would apply to the full amount you take out from a traditional IRA before reaching 59½ or without meeting an exception. This is in addition to the regular income tax you'll owe.

Also, the government is waiting to charge taxes until you withdraw, so the IRS has a rule that says you have to begin taking money out every year starting at a certain age or face penalties. These are called required minimum distributions, and they kick in once you turn 73 — or 75 beginning in 2033 .

The rules are different for Roth IRAs. Because you already paid taxes on Roth contributions upfront, you can withdraw them at any time without incurring taxes or penalties. Also, the early withdrawal penalty only applies to the earnings portion of your withdrawal.

Roth accounts also have five-year rules that affect your withdrawals:

• You must have held a Roth IRA for at least 5 years before you take your first withdrawal. Otherwise, you'll owe income tax on the earnings. This rule applies regardless of your age.
  
• The second five-year rule applies to Roth conversions. If you withdraw converted funds from a Roth IRA within five years of the conversion, you'll owe a 10% penalty on the withdrawal. This rule only applies if you are not yet 59½.
  

You will never be required to take minimum distributions from your Roth IRA, regardless of your age. This can add a lot of flexibility to your withdrawal plan, because you don't have to manage RMDs.

Choosing between a Roth and a traditional IRA involves determining which has the features that best support your goals and the way you intend to use the money. Think about your own situation and consider how things may change over time. What is your tax liability now vs. in the future? Do you think you may want to access your money before you turn 59½?

A traditional IRA might be right for you if:

• You currently have earned income.
• You think you'll be in a lower tax bracket in retirement.
• You would benefit from a potential immediate federal income tax deduction.
• You don't think you'll need to take money out of the account until retirement.
• You plan to start withdrawing your savings between the ages of 59½ and 73.

A Roth IRA might be right for you if:

• You currently have earned income.
• Your MAGI is under the income limits.
• You think you'll be in a higher tax bracket in retirement.
• You would benefit from federal tax-free qualified distributions in the future.
• You want the flexibility to take out the money you've contributed before age 59½ without penalties.
• You want the option to let your money grow as long as you choose, without being required to start withdrawing it at a certain age.

Although it's unlikely either will provide you with a perfect solution, you'll likely find that one is better if you take the time to consider how the features of each support your plans.

Now that you have an overview of what Roth and traditional IRAs are and their key differences, let's look at some of the most common questions people ask when considering which one to invest in.

The short answer is yes, you can have both. You even can contribute to both in the same year. However, your total combined contributions across all IRAs cannot exceed the annual limit. For example, if you are under 50 and you contribute $4,000 to a traditional IRA in 2025, you only can contribute $3,000 to a Roth IRA in 2025. If you contribute the full $7,000 to one, then you won't be able to contribute anything to the other.

Yes, you can convert a traditional IRA to a Roth IRA. Be aware that you'll owe income tax on the amount you convert.

Although income limits apply to Roth contributions, there is no income limit on Roth conversions. You can convert regardless of how high your income is. You'll owe taxes on the converted amount, but the 10% penalty does not apply to conversions even if you are under 59½.

Because your IRA is an individual account and not connected to your employer, changing jobs has no impact on your IRA. You may want to consider rolling your account from your former employer's retirement plan into your IRA. This can simplify your retirement savings.

Early withdrawals are those you take before you reach 59½. The penalty is 10%, and generally applies to the full withdrawal from traditional IRAs but only the earnings portion of Roth IRA withdrawals.