Comparing Traditional and Roth IRAs
Which is better - Traditional or Roth IRA? What you need to know IRA investments eligibility, deductions, taxation, and required minimum distributions.
Why trust The Military Wallet? We’re a veteran-founded resource that has helped millions make strong financial decisions.
Advertiser Disclosure: The Military Wallet and Three Creeks Media, LLC, its parent and affiliate companies, may receive compensation through advertising placements on The Military Wallet. For any rankings or lists on this site, The Military Wallet may receive compensation from the companies being ranked; however, this compensation does not affect how, where, and in what order products and companies appear in the rankings and lists. If a ranking or list has a company noted to be a “partner,” the indicated company is a corporate affiliate of The Military Wallet. No tables, rankings, or lists are fully comprehensive and do not include all companies or available products.
The Military Wallet and Three Creeks Media have partnered with CardRatings for our coverage of credit card products. The Military Wallet and CardRatings may receive a commission from card issuers. You can read more about our card rating methodology here.
Opinions, reviews, analyses & recommendations are the author’s alone and have not been reviewed, endorsed, or approved by any of these entities. For more information, please see our Advertising Policy.
American Express is an advertiser on The Military Wallet. Terms Apply to American Express benefits and offers.
Individual retirement arrangements (IRAs) let you make tax-advantaged contributions that may generate greater gains than investments without similar tax advantages.
Most people can open both traditional and Roth IRAs. While they share similarities, they also offer different features and advantages that may make one a better option than the other, depending on your circumstances.
Traditional and Roth IRAs offer tax advantages that make them strong retirement investment options. The main difference is how and when you pay taxes. A traditional IRA is a tax-deferred retirement plan, and a Roth IRA is a tax-exempt retirement plan.
In other words, the difference between the two retirement plans is when and how you pay taxes.
How Traditional IRAs Work
You contribute to a traditional IRA with pre-tax money that grows tax-deferred until you withdraw it at retirement age or under certain circumstances. If you are eligible to contribute to a tax-deductible traditional IRA based on your income, you’ll record the tax benefit when you file your taxes the following year, usually by reducing your taxable income by the amount of the contribution. Check the IRA contribution limits to see whether you are eligible for tax-deductible contributions. The IRS taxes withdrawals from traditional IRAs. With traditional IRAs, you also must take required minimum distributions starting at age 73.
How Roth IRAs Work
You contribute to a Roth IRA with money you’ve already paid taxes on, and contributions aren’t tax-deductible. However, because you contribute after-tax money, you can take tax-free qualified distributions. Roth IRAs have no required minimum distributions, which gives you more flexibility in retirement.
Please see the link above for Roth IRA income and contribution limits for more information about Roth IRA eligibility. Early withdrawal rules still apply; however, other tax rules allow withdrawals for expenses such as buying your first home, paying for college and other purposes. Please visit the IRS website or contact a tax professional for more details.
Beware of Early Withdrawal Penalties
Making withdrawals before you reach retirement age may subject you to early withdrawal penalties. These penalties can cost you 10% of what you withdraw, and you’ll have to pay taxes on the amount you withdraw immediately. Early withdrawals can cost you a large portion of your retirement fund.
Side-by-Side IRA Comparison Table
| Features | Traditional IRA | Roth IRA |
|---|---|---|
| Who can contribute? | You can contribute at any age if you (or your spouse filing jointly) have taxable compensation. | You can contribute at any age if you (or your spouse if filing jointly) have taxable compensation and your modified adjusted gross income is below specific amounts (see IRA Contribution Limits). |
| Are my contributions deductible? | You can deduct your contributions if you qualify. | Your contributions aren't deductible. |
| How much can I contribute? | The most you can contribute to all of your traditional and Roth IRAs is the smaller of: - For 2024, $7,000, or $8,000 if you're age 50 or older by the end of the year or your taxable compensation for the year. - The income limits for tax deductions for traditional IRAs and income limits for Roth IRA eligibility. See below for more information. | The most you can contribute to all of your traditional and Roth IRAs is the smaller of: - For 2024, $7,000, or $8,000 if you're age 50 or older by the end of the year or your taxable compensation for the year. - The income limit for tax deductions for traditional IRAs and income limits for Roth IRA eligibility. See below for more information. |
| What is the deadline to make contributions? | Your tax return filing deadline (not including extensions). For example, you can make 2023 IRA contributions until April 15, 2024. | Your tax return filing deadline (not including extensions). For example, you can make 2023 IRA contributions until April 15, 2024. |
| When can I withdraw money? | You can withdraw money anytime. However, there may be tax implications if you withdraw before age 59½. | Roth IRA contributions can be withdrawn penalty-free at any time. However, there may be tax implications if you make earnings withdrawals before age 59½. See Roth IRA withdrawal rules for more information. |
Traditional IRA Features
Eligibility
In 2020, the IRS removed the age limit for contributing to your IRA. However, you must still meet certain income requirements to deduct your contributions. You can still contribute to a traditional IRA if you exceed the income limits, but the contributions will be nondeductible.
Contributions
You must make your contributions from taxable, earned income. This includes salary, wages, commissions, nontaxable combat pay and self-employment income. Excluded income includes rent, dividend income and other non-taxable income.
Note on earned income requirements: Military members deployed to a tax-exempt combat zone for an entire year typically have no earned income for tax purposes. These members are still eligible to contribute to either a traditional or Roth IRA through provisions in the HERO Act.
Taxes
You make traditional IRA contributions from income you have not yet paid taxes on. This reduces your taxable income when you file your tax return, giving you an immediate tax advantage. You defer taxes and pay them when you withdraw.
Tax Deduction Rules
| Filing Status | Modified AGI | Deduction |
|---|---|---|
| Single or head of household | $77,000 or less | Full deduction up to the amount of your contribution limit |
| More than $77,000 but less than $87,000 | Partial deduction | |
| $87,000 or more | No deduction. | |
| Married filing jointly or qualifying widow(er) | $116,000 or less | Full deduction up to the amount of your contribution limit |
| More than $123,000 but less than $143,000 | Partial deduction | |
| $143,000 or more | No deduction | |
| Married filing separately | Less than $10,000 | Partial deduction |
| $10,000 or more | No deduction | |
| If you file separately and did not live with your spouse at any time during the year, your IRA deduction is determined under the "Single" filing status. | ||
Distributions
You can begin taking penalty-free withdrawals at age 59½. If you make withdrawals before that age, you may pay taxes on the withdrawals, as well as an early withdrawal penalty, which may be up to 10% of your withdrawal. Speak with a tax professional or the IRS for further guidance.
You must also take required minimum distributions (RMDs), starting at age 73. It’s a good idea to meet with a tax professional before you begin your RMDs to ensure you withdraw enough. Otherwise, you could face additional penalties.
Roth IRA Features
Eligibility
Taxpayers must meet Roth IRA income-eligibility requirements to be eligible to contribute to a Roth IRA. Roth IRA income limits change each year and depend on your tax-filing status.
| Filing Status | Modified AGI | Allowable Contribution |
|---|---|---|
| Married filing jointly or qualifying widow(er) | $236,000 or less | Up to the annual contribution limit |
| $236,001 to $245,999 | Partial amount | |
| $246,000 or more | No contribution | |
| Married filing separately and you lived with your spouse at any time during the year | Less than $10,000 | Reduced amount |
| $10,000 or more | No contribution | |
| Single, head of household or married filing separately and you did not live with your spouse at any time during the year | $150,000 or less | Up to the annual contribution limit |
| $150,001 to $164,999 | Partial contribution | |
| $165,000 or more | No contribution |
Contributions
Annual IRA contribution limits are the same for both Roth and traditional IRAs. Like the traditional IRA, you must make Roth IRA contributions from earned income.
Taxes
The main difference between Roth and traditional IRAs is how and when you pay taxes on the funds. You make Roth IRA contributions from money you have already paid taxes on (post-tax income). You don’t pay further taxes as the investments grow, and you won’t pay taxes on distributions when you withdraw funds. This gives participants much more flexibility regarding how and when they take funds from their Roth IRAs.
Distributions
Unlike traditional IRAs, Roth IRAs have no required minimum distributions. You can leave your money in your Roth IRA until you need it. You can access contributions to your Roth IRAs at any time. However, you cannot access the earnings from your contributions until the account has been open for at least five years and you have reached age 59½. Withdrawing earlier may subject you to early withdrawal penalties.
Which is Better, Traditional or Roth IRA?
There is no one-size-fits-all approach to this question. The answer depends on your unique circumstances. Both types of IRAs can offer tax diversification and more flexibility in retirement.
Factors to Consider
Many factors come into play when comparing Roth and traditional IRAs, including your current tax bracket and your expected tax bracket in retirement. You also need to consider current income, expected future income, Roth or traditional IRA income eligibility, contribution limits and required minimum distribution requirements.
Tax-free traditional IRA contributions phase out at lower income levels than Roth IRAs. So, you may consider a Roth if you cannot receive the tax deductions from a traditional IRA. Traditional IRAs also have minimum withdrawal requirements, while Roth IRAs do not.
Which Is Better?
Many financial experts recommend you start investing with a Roth IRA if you are eligible because they offer tax-free withdrawals and other benefits such as higher income levels for eligibility and no required minimum distributions. Overall, they provide more flexibility than traditional IRAs. That said, a traditional IRA is the right choice in some cases.
We have two articles that further compare the pros and cons of Roth and traditional IRAs:
- Six Reasons to Choose a Roth IRA over a Traditional IRA
- Five Reasons to Choose a Traditional IRA over a Roth IRA
Take some time to consider your situation before deciding which IRA to open. The long-term benefits are worth getting it right the first time.
