Roth IRA vs. traditional IRA

Individual retirement accounts (IRAs) are a powerful way to help save for retirement—and people across the US are catching on. A 2024 study from the Investment Company Institute found that 44% of US households have an IRA; in 2014, that number was only 34%.¹ But before opening an IRA, you might wonder what the best type of account is for your situation. Here's what you need to know about a Roth IRA versus a traditional IRA.

What's a Roth IRA?

A Roth IRA is a tax-advantaged retirement savings account independent from workplace savings plans. You contribute money you've already paid taxes on, which can then be invested and potentially grow federally-tax-free. You can withdraw your contributions at any time, and you can withdraw any investment earnings federally-tax-free, provided you meet certain requirements.² To contribute to a Roth IRA, though, you have to fall within the IRS's Roth IRA income limits, and you can only contribute up to the annual IRA contribution limit.

Advantages of Roth IRAs

Here are 3 reasons why saving with a Roth IRA might be a smart move:

• You can take out what you put in: You're free to withdraw the money you've contributed to your Roth IRA at any time without any taxes or penalties.
• Tax-free growth and withdrawals later on: Any money your investments earn in your Roth IRA can be taken out tax- and penalty-free once you reach age 59½ and you meet the 5-year aging rule.² That means at least 5 years must elapse between the beginning of the tax year of your first contribution to a Roth account and withdrawal of earnings.
• No required minimum distributions (RMDs): Unlike traditional IRAs, you're not required to take money out of your Roth IRA at any specific age. That allows your investments to keep potentially growing until you're ready to withdraw or pass them down.

Disadvantages of Roth IRAs

There are also some drawbacks to consider before saving in a Roth IRA:

• Income limits to contribute: If your income is above the threshold set by the IRS, you might only be able to contribute a small amount—or nothing at all.
• No upfront tax deduction: Although Roth IRAs have tax-free withdrawals in retirement, contributions are not tax-deductible. That means you won't see immediate savings in the year you contribute.

What's a traditional IRA?

A traditional IRA is a tax-deferred retirement savings account you can open, contribute to, and invest in, independently of any workplace retirement plan. You can contribute up to the annual IRA contribution limit each year, and that money can be invested, potentially growing over time. If you're eligible, you can deduct your contributions from your federal taxes, putting more money in your pocket in the year you contribute. If you invest your traditional IRA dollars, any earnings would be tax-deferred and could be withdrawn penalty-free after age 59½, or for other qualified reasons.³

Advantages of traditional IRAs

Here are some of the main reasons traditional IRAs have become a common way to save for retirement:

• Simple to qualify: As long as you have earned income in the current tax year, you can contribute to a traditional IRA. Even if you're covered by a workplace retirement savings plan, you can still save and invest through a traditional IRA.
• Tax break in the current tax year: If eligible, you could deduct contributions made to your traditional IRA from your federal income taxes, depending on your income and whether you're covered by a workplace plan.⁴ Check out this traditional IRA deductions calculator to find out if you are eligible for tax-deductible contributions.
• Penalty-free withdrawals for qualified expenses: Traditional IRAs allow you to take out money early for some of life's biggest expenses, like a first home purchase up to a lifetime limit of $10,000, qualified education costs, a birth, or an adoption.⁵ Both accounts offer penalty-free withdrawals for qualified expenses (although income tax may still be due in the case of a Roth IRA that has not met the 5-year aging requirement).

Disadvantages of traditional IRAs

Keep in mind these downsides to traditional IRAs before opening and contributing:

• Penalties for early withdrawals: If you remove money from the account before age 59½ for an unqualified reason, you'll owe income tax on that money, as well as a penalty. Of course, Roth IRAs also have this penalty for unqualified early withdrawals.
• Required distributions: Traditional IRAs require you at age 73 and older to take a fixed percentage of the money in the account out each year, which is taxed as federal income.

Similarities between traditional IRAs and Roth IRAs

Traditional IRAs and Roth IRAs share many characteristics, including the following:

• Designed for retirement savings: Both accounts were built to help you save and invest for retirement—that's why the age for penalty-free withdrawals is 59½.
• DIY: You can open and contribute to a traditional IRA or a Roth IRA regardless of whether you contribute to a workplace retirement plan, like a 401(k) or 403(b).
• Shared contribution limit: Roth IRAs and traditional IRAs have the same contribution limit. In fact, even if you have both these accounts, your total IRA contributions to these 2 accounts combined must not exceed that annual limit. Note though that the limit applies at the individual level, and a spouse can contribute up to their own limit.
• Eligibility based on earned income: To be eligible to contribute to either type of account, you need to have earned income over that tax year. If your earned income is less than the IRS's contribution limit, you can only contribute up to the amount you've earned.

Differences between traditional IRAs and Roth IRAs

Here's what distinguishes a traditional IRA from a Roth IRA:

• When you get the tax break: The primary difference between traditional IRAs and Roth IRAs is the timing of possible tax advantages. If you're eligible, traditional IRAs give you a deduction on taxable income in the year you contribute, but you have to pay taxes when you withdraw money later. In a Roth IRA, you receive no tax benefits in the year you contribute, but when you withdraw at age 59½ or later, you won't have to pay any federal taxes, provided you meet certain conditions.²
• Income limits for eligibility: While anyone with earned income can contribute to a traditional IRA, only those within the IRS's income limits can contribute to a Roth IRA. Traditional IRAs have their own income limits for eligibility to deduct contributions, though.⁶
• RMDs: Traditional IRAs require you to start taking money out at age 73. Roth IRAs don't have RMDs.

Should you open a traditional IRA or Roth IRA?

If you qualify for both a traditional and Roth IRA, the right choice on which to open might come down to the following:

Your current vs. expected tax bracket

Because the 2 accounts' tax advantages come at different times, it's important to think about how those benefits would help you today and in the future. A traditional IRA might be the better fit if you expect your tax rate to be lower in retirement. That's because you may be able to deduct your contributions now and pay taxes later—potentially at a lower rate. In contrast, a Roth IRA might be a better fit if you think your tax rate is lower today than it will be in retirement. That's because you'll pay taxes on your contributions now, but your withdrawals could be completely tax-free later.

Withdrawal flexibility

If you anticipate needing access to your cash ahead of retirement, a Roth IRA may be the better bet. Only a Roth IRA allows withdrawals of your contributions for any reason, at any time, without a tax penalty.

Can you have both a Roth IRA and a traditional IRA?

Yes, you can have both a Roth IRA and a traditional IRA. In fact, so long as you fall within the appropriate income limits and are eligible, you can contribute to both types of accounts within the same year. The catch? You can only contribute up to a single IRA contribution limit across both accounts. Having 2 accounts does not mean 2 separate contribution limits. You can also have an IRA and a workplace retirement plan: These have separate contribution limits, and your spouse has separate limits as well.

Having different retirement accounts with different tax advantages could be a strategic tool. With your tax advantages diversified across different types of accounts, you may potentially reduce your overall tax liability.

Learn more about tax-smart asset location.

Can you convert a traditional IRA into a Roth IRA?

Yes, you can convert money from a traditional IRA into a Roth IRA. This can help those who are not eligible to contribute to a Roth IRA still benefit from the account's tax advantages. A Roth IRA conversion allows you to transfer all or a portion of money saved in your traditional IRA to a Roth IRA. But you may be on the hook for income taxes on pre-tax contributions you made to your traditional IRA and any tax-deferred investment earnings. When you convert, you will also need to consider any pretax contributions and earnings across all of your IRAs—not just the traditional IRAs in question.

Learn more about converting a traditional IRA to a Roth IRA.

How to open a Roth IRA or traditional IRA

If you're ready to start saving for retirement with a Roth or traditional IRA, here's how to get going:

1. Pick where to open your account: Choose a financial institution to house your IRA. Look for one that's reputable, doesn't charge account fees, and doesn't require a minimum balance.
2. Provide your personal info: You'll need to share details like your Social Security number, address, employer info, and bank account info for transfers. The institution will then verify your identity. The whole process usually takes just a few minutes and is often entirely online.
3. Add money to your account: Once your IRA is open, you can start funding it. Just be sure to stay within the annual contribution limit across all your IRAs to avoid tax penalties. You can contribute once a year, monthly, or even with each paycheck. Setting up automatic contributions can help you stay consistent.
4. Choose your investments: A common mistake among IRA holders is to fund their IRAs without directing their dollars toward investments. If you'd like your contributions to potentially grow, consider buying investments within your IRA.