Planning for retirement is important, especially if you don’t have access to a workplace savings plan. In such cases, opening an individual retirement account (IRA) could be a smart choice. However, deciding between Roth vs. traditional IRAs can be challenging. This decision will significantly impact your financial future, so it’s crucial to understand the key differences between these two types of accounts. For help making more informed decisions around your retirement plan, consider working with a financial advisor.

Roth vs. Traditional IRAs: The Basics

The investing portion of these two options works exactly the same. You put money into your account and invest it as you please. Mutual funds and exchange-traded funds (ETFs) are the most popular options, but you can also invest in stocks, bonds and other securities. You keep investing while you work and see your account grow, thanks to compound interest. When you retire, you start taking the money out, often as monthly distributions.

The difference between the two comes when you consider taxes. Contributions to a traditional IRA are tax-deductible, meaning that every dollar you contribute reduces your taxable income, up to the IRS limit, which stands at $7,000 in both 2024 and 2025. The money grows without being taxed until you start taking distributions. When you reach retirement and start taking distributions, the money is taxed as normal income.

In some states, however, IRA benefits are exempt from state income taxes. If you have traditional IRAs, you’ll need to take required minimum distributions (RMDs), which kick in when you hit age 73 (age 75 for people born in 1960 or later). You can’t leave the money in the account to grow indefinitely.

A Roth IRA, on the other hand, is funded with after-tax dollars. You can’t deduct your contributions. Because you pay taxes on the money before it goes into the account, you don’t have to pay taxes when you take the money out. Roth IRAs also aren’t subject to RMD rules, so you won’t have to worry about mandatory withdrawals.

Roth IRA vs. Traditional IRA: Withdrawals

Withdrawal rules differ significantly between Roth and traditional IRAs, particularly regarding taxes and penalties.

For traditional IRAs, early withdrawals before age 59 ½ generally incur a 10% penalty. However, exceptions exist for specific circumstances like first-time home purchases and higher education expenses.

Roth IRAs, in contrast, allow tax-free and penalty-free withdrawals of contributions at any time. However, earnings withdrawals must meet the five-year rule and the age 59 ½ requirement to be tax-free. The five-year rule states that at least five years must pass from the beginning of the tax year in which the first Roth contribution was made before earnings can be withdrawn tax-free. If withdrawn earlier, earnings may be subject to income tax and a penalty unless an exception applies.

How to Choose

Choosing between a traditional and a Roth IRA often depends on your current and expected future tax bracket. If you are in a relatively high tax bracket now and think that your tax bracket will be lower in retirement, a traditional IRA makes more sense. If you are in a very low tax bracket now, though, and expect your income tax rate will be much higher when you retire, a Roth IRA may be a better choice.

If you already have a 401(k) through your job, you’re getting a lot of the benefits of a traditional IRA already. Your contributions lower your taxable income and your account grows tax-deferred. Plus, 401(k) plans have higher contribution limits than IRAs. So, if you already use a 401(k) you may want to diversify your retirement holdings by opening a Roth IRA on the side. That way, when you hit retirement, you’ll have at least one source of tax-free income.

Roth IRA contributions are subject to annual income limits, which may dictate which type of IRA you can contribute to. For the 2025 tax year, single filers can make a full contribution ($7,000) to a Roth IRA if their modified adjusted gross income (MAGI) is less than $150,000 ($236,000 for married couples filing jointly). Single filers can make a partial contribution in 2025 if their MAGI is more than $150,000 but less than $165,000 (more than $236,000 but less than $246,000 for joint filers).

If your income exceeds the Roth IRA limits, however, you can execute a backdoor Roth conversion.

Roth vs. Traditional IRA: How They Differ in Retirement

As we mentioned, one of the main advantages of a Roth IRA is that it doesn’t have RMDs. That means that you never have to tap your savings if you have other sources of retirement income to support you. For high-net-worth individuals focused on estate planning, Roth IRAs offer significant advantages.

Once you have a Roth IRA you can leave it to your heirs in your will. You can continue contributing to it every year you have earned income, making it a great way to accrue tax advantages if you continue to work part-time in retirement.

You can also contribute to a non-deductible traditional IRA and then roll it over to a Roth IRA. You’ll have to pay taxes on the money you roll over, but then you’ll be good to go with your Roth IRA. Keep in mind, though, that the Roth IRA backdoor conversion option might not be around forever. Some policymakers argue it’s a loophole that allows high-income earners to bypass Roth IRA income limits.

Bottom Line

Around half of Americans don’t have any retirement accounts to their name. If you’re choosing between a Roth and a traditional IRA, you’re in a privileged position. Consider the tax and estate planning implications of deciding between a Roth IRA and a traditional IRA. And remember, any time you open a new investing account you should shop around until you find an account with low fees. Fees eat into the value of your retirement holdings over time. Opt for low fees and you’ll keep more of your hard-earned dollars.

Retirement Tips

• Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Use SmartAsset’s free retirement calculator to get a sense of it you’re on track to meet your goals.

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