Traditional and Roth IRAs differ mainly in how and when you get the tax break

Quick Summary

  • The biggest difference between Roth and traditional IRAs is when you get the tax break.
  • With traditional IRAs, you deduct contributions now and pay taxes on withdrawals later.
  • With Roth IRAs, you pay taxes on contributions now and get tax-free withdrawals later.
  • You should consider IRA tax breaks and other differences before choosing a traditional or Roth IRA. 

What’s the Difference Between Traditional and Roth IRAs?

Traditional and Roth IRAs are retirement savings accounts that encourage you to save by offering tax advantages. Rather than being investments, traditional and Roth IRAs are accounts that hold the investments you choose.

After you open an IRA at a bank or brokerage, you can select a variety of investments, including exchange-traded funds (ETFs), mutual funds, stocks, bonds, and target retirement funds. 

While these accounts have similarities, there are key differences that are important to understand. To get you started, here’s a quick look at how traditional and Roth IRAs differ. 

Taxes for Traditional vs. Roth IRA

Both traditional and Roth IRAs provide generous tax breaks. But it’s a matter of timing when you get to claim them. Traditional IRA contributions are tax-deductible on both state and federal tax returns for the year you make the contribution. Withdrawals in retirement are taxed at ordinary income tax rates. 

Contributions to traditional IRAs generally lower your taxable income in the contribution year. That lowers your adjusted gross income, helping you qualify for other tax incentives you wouldn’t otherwise get, such as the child tax credit or the student loan interest deduction. (Note that if you or your spouse has an employer retirement plan, your ability to deduct contributions will be reduced or eliminated.)

With Roth IRAs, you don’t get a tax break when you make a contribution, so they don’t lower your adjusted gross income. But your withdrawals in retirement are generally tax-free, which can be a significant advantage for many retirement savers.

IRA Income Limits

Anyone with earned income who is younger than 70 ½ can contribute to a traditional IRA. Whether the contribution is tax-deductible depends on your income and whether you (or your spouse, if you’re married) are covered by an employer-sponsored retirement plan, such as a 401(k).

Roth IRAs don’t have age restrictions, but they do have income-eligibility restrictions. In 2019, single tax filers, for instance, must have a modified adjusted gross income (MAGI) of less than $137,000 to contribute to a Roth IRA. Contribution limits are phased out starting with a modified AGI of $122,000per IRS guidelines

Married couples filing jointly must have modified AGIs of less than $203,000 to contribute to a Roth. Contribution limits are phased out starting at $193,000. 

You can contribute up to $6,000 to a traditional or Roth IRA for 2019 if you’re under age 50. If you’re age 50 or older, you can make an additional $1,000 “catch-up” contribution. 

IRA Withdrawal Rules

Another difference between traditional and Roth IRAs is when you have to withdraw the savings. With traditional IRAs, you have to start taking required minimum distributions (RMDs)—mandatory, taxable withdrawals of a certain percentage of your funds—at age 70 ½. That’s true whether you need the money at that point or not. 

With Roth IRAs, you’re not required to withdraw any money during your lifetime. There are no required minimum distributions. If you have enough other income, you can let your Roth IRA continue to grow tax-free throughout your lifetime. This makes them ideal wealth-transfer vehicles.

The same applies to your heirs. Beneficiaries of Roth IRAs don’t owe income tax on withdrawals and can stretch out distributions over many years. However, beneficiaries may still owe estate taxes.

Early Withdrawals from IRAs

If you withdraw money from a traditional IRA before age 59 ½, you’ll pay taxes and a 10% early withdrawal penalty. You can avoid the penalty (but not the taxes), however, if you use the money to pay for qualified first-time home-buyer expenses (up to $10,000), qualified higher education expenses. 

Hardships, such as disability and certain levels of unreimbursed medical expenses, may also be exempt from the penalty, but you’ll still pay taxes on the distribution.

You can withdraw Roth contributions (but not earnings) penalty- and tax-free at any time, for any reason, even before age 59 ½. Different rules apply if you withdraw earnings. 

If you want to withdraw earnings, you can avoid taxes and the 10% early withdrawal penalty if you’ve had the Roth IRA for at least five years and you:

  • Are at least 59 ½ year old.
  • Have a permanent disability.
  • Die and the money is withdrawn by your beneficiary or estate.
  • Use the money (up to a $10,000 lifetime maximum) for a first-time home purchase.

If you’ve had the account for less than five years, you can still avoid the 10% early withdrawal penalty if:

  • You’re at least 59 ½ years old.
  • The withdrawal is due to a disability or certain financial hardships.
  • Your estate or beneficiary made the withdrawal after your death.
  • Use the money (up to a $10,000 lifetime maximum) for a first-time home purchase, qualified education expenses, or certain medical costs.

IRAs and Future Tax Rates

A key consideration when deciding between a traditional and a Roth IRA is how you think your future income—and by extension, your income tax bracket—will compare to your current situation.

In effect, you have to determine if the tax rate you pay on your Roth IRA contributions today will be higher or lower than the rate you’ll pay on distributions from your traditional IRA later. 

Of course, it’s hard to predict what federal and state tax rates will be 10, 20 or 40 years from now. Given today’s historically low federal tax rates and the large U.S. deficit, many economists believe federal income tax rates will rise in the future—meaning Roth IRAs may be the better long-term choice. But of course, no one knows.

Although conventional wisdom suggests that gross income declines in retirement, taxable income sometimes does not. Think about it. You’ll be collecting (and owing taxes on) Social Security payments, and you may have income from investments. You might opt to do some consulting or freelance work, on which you’ll have to pay self-employment tax. 

And once the kids are grown and you stop adding to the retirement nest egg, you lose some valuable tax deductions and tax credits. All this could leave you with higher taxable income, even after you stop working full-time.

In general, if you think you’ll be in a higher tax bracket when you retire, a Roth IRA may be the better choice. You’ll pay taxes now, at a lower rate, and withdraw tax-free in retirement when you’re in a higher tax bracket. 

If you expect to be in a lower tax bracket during retirement, a traditional IRA might make the most financial sense. You’ll reap tax benefits today while you’re in the higher bracket and pay taxes later on at a lower rate. 

Comparing Traditional and Roth IRAs

Here’s a quick summary of the key differences between traditional and Roth IRAs.  Keep in mind that Congress can change IRA rules at any time, so these regulations could be different when you retire.



Roth IRA

Traditional IRA

2019 Contribution Limits $6,000; $7,000, if age 50 or older $6,000; $7,000, if age 50 or older
2019 Income Limits Eligible are single tax filers with modified AGIs of less than $137,000 (phase-out begins at $122,000); married couples filing jointly with modified AGIs of less than $203,000 (phase-out begins at $193,000). Anyone with earned income can contribute, but tax deductibility is based on income limits and participation in an employer plan.
Tax Treatment No tax break for contributions; tax-free earnings and withdrawals in retirement. Tax deduction in contribution year; ordinary income taxes owed on withdrawals.
Withdrawal Rule Contributions can be withdrawn at any time, tax-free and penalty-free. Five years after your first contribution and age 59 ½, earnings withdrawals are tax-free, too. No withdrawals required during the account holder’s lifetime; beneficiaries can stretch distributions over many years. Withdrawals are penalty-free beginning at age 59 ½. Distributions must begin at age 70 ½; beneficiaries pay taxes on inherited IRAs.
Extra Benefits After five years, up to $10,000 of earnings can be withdrawn penalty-free to cover first-time home-buyer expenses. Qualified education and hardship withdrawals may be available without penalty before the age limit and five-year waiting period. These may be taxed. Contributions lower taxpayer’s AGI, potentially qualifying him or her for other tax incentives. Up to $10,000 penalty-free withdrawals to cover first-time home-buyer expenses, but taxes due on distributions. Qualified education and hardship withdrawals are also available.

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