Roth IRA vs. traditional IRA: What’s the difference?
Both IRAs offer tax-advantaged ways to save for retirement. However, there are differences. Understanding them can help you make decisions for funding your retirement.
Roth IRA vs. traditional IRA: Key differences
Traditional IRAs and Roth IRAs are types of individual retirement accounts (IRAs) designed to help you save for retirement. Both IRA options can be funded by contributions or by rolling over your retirement assets from a 401(k) at another financial institution. The difference between them is mostly how and when your money is taxed.
Traditional IRA vs. Roth IRA: What you need to know
| Traditional IRA | Roth IRA | |
|---|---|---|
| Overview | This IRA offers you the potential to save on taxes upfront and defer them until you take distributions from the account. | This IRA helps you save for retirement with after-tax contributions that offer the potential for tax-free income in retirement. |
| Taxes | You make contributions on a pretax basis (if your income is below a certain threshold) and pay no taxes until you withdraw money. | Your contributions are not tax deductible, but any earnings growth is tax free, and qualified withdrawals are tax and penalty free. |
Contribution Limits Note: The figures shown to the right are the amounts you can contribute in a given year, in total, across all your traditional and Roth IRAs, including those you hold at other financial institutions. | For the 2024 tax year:
For the 2023 tax year:
| For the 2024 tax year:
For the 2023 tax year:
Your ability to contribute to a Roth IRA phases out at certain income levels. |
| Contribution Eligibility | You must have taxable compensation to be eligible to contribute. | You must have taxable compensation AND your income must be below a certain threshold to be eligible to contribute. |
| Contribution Deadline | You can make contributions throughout the year, up to the tax-filing deadline, not including extensions (generally April 15). See the Tax season calendar for exact deadline. | You can make contributions throughout the year, up to the tax-filing deadline, not including See the Tax season calendar for exact deadline. |
| Saver’s Credit Eligibility | Eligible taxpayers can receive a nonrefundable tax credit of up to $1,000 for single filers ($2,000 for joint filers) for their traditional IRA contributions. | Eligible taxpayers can receive a nonrefundable tax credit of up to $1,000 for single filers ($2,000 for joint filers) for their Roth IRA contributions |
| Distributions | Distributions are generally subject to taxes. If you take a distribution before you’re 59½, you might have to pay an additional 10% tax. | Distributions are tax free if they’re “qualified.” It’s a qualified distribution if:
If your withdrawal isn’t a qualified distribution, you’ll have to pay taxes on your earnings and you may have to pay an additional 10% tax. |
| Required Minimum Distributions | You’re required to withdraw a minimum amount each year beginning at age 73. These are known as required minimum distributions, or RMDs. | You’re not required to withdraw a minimum amount of money at a certain age. |
| Inherited IRAs | You’re generally required to take a distribution by a certain deadline. The amount and deadline vary depending on what type of beneficiary you are. As the heir, you’ll generally pay taxes on these distributions based on your current income tax rate. | You’re generally required to take a distribution by a certain deadline. The amount and deadline vary depending on what type of beneficiary you are. Because you’re the heir, these distributions will be generally tax free, since the original owner paid taxes on their contributions. |
| Investment Options | You can invest your assets in a variety of investment options, including stocks, bonds, certificates of deposit (CDs) and mutual funds. | You can invest your assets in a variety of investment options, including stocks, bonds, certificates of deposit (CDs) and mutual funds. |
How do I decide between a traditional IRA and a Roth IRA?
Investing in accounts with different tax treatments can provide you flexibility (and potentially higher after-tax income) in retirement. As a result, you should consider contributing to traditional and Roth IRAs alike. However, the focus of your contributions may change depending on your life stage and tax situation.
A traditional IRA tends to be more beneficial when:
- You expect your tax rate in retirement to be lower than your current tax rate.
- You're in a high bracket today and would prefer the immediate tax savings of a deduction (if eligible).
A Roth IRA tends to be more beneficial when:
- You’re young, in a low tax bracket or expect your tax rate in retirement to be higher than your current tax rate.
- You can forgo the deduction today for the prospect of tax-free retirement income.
- You plan to pass these assets to your heirs instead of spending them in retirement.
- You expect higher income from taxable sources in retirement and would benefit from a Roth's tax-free income to help manage your taxes and Medicare premiums in retirement.
- You have most of your retirement assets in traditional IRAs or 401(k) accounts.
Choosing between a traditional IRA and a Roth IRA? We can help.
Start navigating IRAs by finding an Edward Jones financial advisor today. Our financial advisors can help you understand what questions to ask as you decide which IRA might be right for you. They'll work with you to build a solid long-term strategy as you plan for and enjoy your retirement. Contact us for a no-obligation consultation.
Important Information:
Edward Jones, its employees and financial advisors cannot provide tax or legal advice. You should consult your attorney or qualified tax advisor regarding your situation. This content should not be depended upon for other than broadly informational purposes. Specific questions should be referred to a qualified tax professional.