Roth IRA vs Traditional IRA
Should I open a Roth IRA or a Traditional IRA?
Roth uses after-tax money and grows tax-free. Traditional may give you a tax break today but you pay tax on withdrawals.
Key takeaways
- Roth = pay tax now, no tax later
- Traditional = (often) deduct now, pay tax later
- Both have the same yearly contribution limit
- Income limits apply to Roth
Roth IRA vs Traditional IRA at a glance
| Factor | Roth IRA | Traditional IRA |
|---|---|---|
| Tax timing | After-tax now, tax-free later | Pre-tax now, taxed at withdrawal |
| Income limits | Yes | Deductibility phases out with workplace plan |
| RMDs | None for original owner | Required starting at the SECURE Act age |
When to choose Roth IRA
You expect higher taxes later or want tax-free growth and flexible withdrawals of contributions.
When to choose Traditional IRA
You want to reduce taxable income today and expect a lower bracket in retirement.
TL;DR
Both are individual retirement accounts. The difference is when you pay tax.
Key differences
- Roth IRA: contribute after-tax dollars. Qualified withdrawals in retirement are tax-free.
- Traditional IRA: contributions may be tax-deductible now. Withdrawals in retirement are taxed as income.
When each wins
- Roth wins when you expect to be in a higher tax bracket later, or you want tax-free growth and flexibility on contributions.
- Traditional wins when you want to lower your taxable income today and expect to be in a lower bracket in retirement.
Watch-outs
Roth has income limits. Traditional deductibility phases out if you (or a spouse) have a workplace plan above certain incomes.
Frequently asked
›Can I have both?
Yes. Combined contributions across both can't exceed the annual IRA limit.
Related
A 401(k) is set up through your employer with much higher limits. An IRA is opened on your own with more investment choices.
Solo 401(k) usually lets you put away more on the same income, and supports Roth and loans. SEP is simpler to open and run.
Wealthypedia is educational. This isn't financial, tax, legal, or investment advice. Last reviewed —.