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Understanding the ins and outs of Traditional and Roth IRAs can make a big difference in your retirement planning. While both offer tax advantages, they work differently and cater to various financial situations. This guide breaks down the key features, contribution limits, and how to decide between the two.
What Is a Traditional IRA?
A traditional IRA is a savings plan that allows contributors to use pre-tax dollars to invest in stocks, bonds, CDs, mutual funds and other investment vehicles.
It’s a popular savings tool for individuals who may not have access to employer-sponsored retirement plans, or for those who want to have an additional retirement account that offers tax-deferred growth on investments.
Key Features:
- Withdrawal Rules: Withdrawals are taxed as ordinary income. Early withdrawals (before age 59½) may incur a 10% penalty, though there are some exceptions. Required Minimum Distributions (RMDs) start at age 73.
- Tax Advantages: Contributions may be tax-deductible, depending on your income and whether you or your spouse are covered by an employer-sponsored retirement plan.
- Eligibility: Anyone with earned income can contribute. There are no income limits for contributions, but tax deductibility phases out at higher income levels if you’re covered by a retirement plan.
What Is a Roth IRA?
A Roth IRA is funded with after-tax dollars, meaning your contributions are not tax-deductible. However, qualified withdrawals in retirement are entirely tax-free.
Key Features:
- Withdrawal Rules: Contributions can be withdrawn at any time without penalty or taxes. Earnings, however, may be subject to taxes and penalties if withdrawn before age 59½ or before the account has been open for five years. Roth IRAs do not have RMDs.
- Tax Advantages: Contributions grow tax-free, and withdrawals are also tax-free as long as certain conditions are met.
- Eligibility: Contributions are subject to income limits. High earners may not qualify for direct contributions, but backdoor Roth conversions are an option.
Contribution Limits for 2025
The IRS sets annual contribution limits for both Traditional and Roth IRAs. For 2024, the limits are as follows:
- Under Age 50: $7,000 per year.
- Age 50 and Over: $8,000 per year (includes a $1,000 catch-up contribution).
These limits apply to the total amount contributed to both types of IRAs in a single year.
| Tax Year | Contribution Limit (Age 49 or Younger) | Catch-Up Contribution (Age 50 or Older) | Contribution Limit (Age 50 or Older) |
|---|---|---|---|
| 2025 | $7,000 | $1,000 | $8,000 |
| 2024 | $7,000 | $1,000 | $8,000 |
| 2023 | $6,500 | $1,000 | $7,500 |
| 2019 – 2022 | $6,000 | $1,000 | $7,000 |
| 2013 – 2018 | $5,500 | $1,000 | $6,500 |
| 2008 – 2012 | $5,000 | $1,000 | $6,000 |
| 2006 – 2007 | $4,000 | $1,000 | $5,000 |
| 2005 | $4,000 | $500 | $4,500 |
| 2002 – 2004 | $3,000 | $500 | $3,500 |
Income Limits for Contributions
Income limits affect Roth IRA contributions and the deductibility of Traditional IRA contributions.
Traditional IRA Deductibility:
- For single taxpayers covered by a workplace retirement plan, the phase-out range is increased to between $79,000 and $89,000
- For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase-out range is increased to between $236,000 and $246,000
- For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is increased to between $126,000 and $146,000, up from between $123,000 and $143,000.
Roth IRA Contribution Eligibility:
- The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.
- The income phase-out range for taxpayers making contributions to a Roth IRA is increased to between $150,000 and $165,000 for singles and heads of household
- For married couples filing jointly, the income phase-out range is increased to between $236,000 and $246,000, up from between $230,000 and $240,000.
2025 IRA Phase-Out Limits Chart
| 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. | ||
Roth IRA Income Limits
The IRS has specific income restrictions that determine who can contribute to Roth IRAs.
Income limits based on your Roth IRA eligibility phase out for single filers with a MAGI between $146,000 and $161,000, and between $230,000 and $240,000 for married couples who file jointly.
If you exceed these income limits, you may want to consider contributing to a non-deductible traditional IRA, which allows you to contribute up to the $7,000 IRA limit each year. You can roll these contributions in to a Roth IRA later.
2025 Roth IRA Income Limits Chart
| 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 |
Did You Contribute Too Much to Your IRA?
Deduction and phase-out limits may affect your ability to make contributions. Here’s what happens if you contribute too much to an IRA.
Choosing Between Traditional and Roth IRAs
The decision comes down to your current financial situation and future expectations:
- Choose a Traditional IRA if you expect to be in a lower tax bracket during retirement and want the immediate tax benefit.
- Choose a Roth IRA if you expect to be in a higher tax bracket during retirement or value the flexibility of tax-free withdrawals.
Many people benefit from contributing to both types, diversifying their tax strategy for retirement.
Frequently Asked Questions
What happens if I exceed the contribution limit?
Excess contributions incur a 6% penalty tax each year until corrected. To avoid this, withdraw the excess amount or apply it to next year’s contributions.
Can I contribute to both a Traditional and Roth IRA?
Yes, but the combined total cannot exceed the annual contribution limit.
What about rollovers?
You can roll over funds from employer-sponsored plans (like a 401(k)) into a Traditional or Roth IRA. However, Roth rollovers may trigger a tax liability. Per current IRS regulations, your former employer may complete your request through a direct or indirect rollover of your retirement account funds.
For more information about IRAs, see:
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