Roth IRA vs. traditional IRA: Which should you choose?
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Updated: July 25, 2024
If you have retirement dreams, sooner or later you’ll need a retirement savings account. While 401(k)s are entrenched in the workplace, there are compelling and tax-advantaged IRA (Individual Retirement Account) alternatives that can complement your 401(k) or even become your primary savings vehicle.
Now all you have to do is decide: Do you expect to be in a higher tax bracket just before you retire?
If your answer is “yes,” a Roth IRA might be the smarter choice (I’ll explain why shortly).
But there’s more to consider. Roth and traditional IRAs offer different benefits and a host of different income and contribution rules. So before you take the plunge, let’s break down these two options and find out which one aligns best with your financial goals.
Roth vs traditional IRA: Differences at a glance
| Roth IRA | Traditional IRA |
|---|---|
| A Roth IRA is a retirement savings account where contributions are taxed upfront, but withdrawals are tax-free during retirement | A traditional IRA is a retirement account with tax-deductible contributions and taxed withdrawals during retirement, offering upfront tax benefits |
| Who it’s for: Individuals who expect to be in a higher tax bracket at retirement or prefer tax-free withdrawals are best suited for a Roth IRA | Who it’s for: Individuals who expect to be in a lower tax bracket at retirement or seek immediate tax deductions are best suited for a traditional IRA |
Roth IRAs vs traditional IRAs
Roth vs traditional IRA taxes compared
| Roth IRA | Traditional IRA |
|---|---|
| Roth IRAs are funded with post-tax contributions. Withdrawals, including earnings, are tax-free in retirement | Traditional IRAs offer tax-deductible contributions, but withdrawals during retirement are taxed as ordinary income – including earnings and contributions |
Roth vs Traditional IRA contributions compared
| Roth IRA | Traditional IRA |
|---|---|
| Max contribution: $7,000 for individuals under 50, $8,000 for 50 and older | Max contribution: $7,000 for individuals under 50, $8,000 for 50 and older |
Roth vs traditional IRA income requirements compared
| Roth IRA | Traditional IRA |
|---|---|
| Single filers: Full contribution with modified adjusted gross income (MAGI) of less than $146,000. Those with MAGI between $146,000 and $161,000 can make partial contributions. Above $161,000 – not eligible | No income limits on contributions |
| Married couples filing jointly: Full contribution for MAGI of less than $230,000. Partial contribution for MAGI between $230,000 and $240,000. Above that – not eligible | No income limits on contributions. |
| Married couples filing separately: If you lived with your spouse during the year, partial contribution up to $10,000 income. No contribution permitted on income above $10,000 | No income limits for making contributions. However, deductibility is affected if either spouse is covered by a retirement plan at work. |
Roth vs traditional IRA withdrawal age compared
| Roth IRA | Traditional IRA |
|---|---|
| You can withdraw money from your IRA without penalty starting at 59.5 years old | You can withdraw money from your IRA without penalty starting at 59.5 years old |
Roth vs. traditional IRA required minimum distributions
| Roth IRA | Traditional IRA |
|---|---|
| Not required | Starts at age 73 |
As you can see, the simple answer depends on whether or not you think you’ll be making more money in the years leading up to retirement. That’s all of us, unless you’re a total pessimist, right?
Because Roth IRA withdrawals are generally tax free, you won’t have to pay hefty IRS bills when it’s time to start drawing your money.
On the other hand, if you choose a traditional IRA, you’ll take advantage of the tax deduction now.
But that’s not the only factor that can go into your decision when it comes down to traditional versus Roth.
Let’s break it all down so you can determine in which scenario each IRA type makes more sense.
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When a traditional IRA makes more sense
When you have no other retirement plan: If you have no other retirement plan, then your contributions to a traditional IRA will be fully tax deductible, regardless of income. This is especially beneficial if you are in the higher income tax brackets — say, 24% or higher.
When the IRA is tax deductible, even if you’re covered by another plan: Even if you’re covered by another retirement plan, you can still deduct a traditional IRA contribution if your income does not exceed certain limits. For 2024, singles can earn up to $77,000 per year and still deduct the full amount of the contribution. The deduction phases out between $77,000 and $87,000, after which none of it will be deductible.
If you’re married filing jointly, you can earn up to $123,000 and still deduct the full amount of the contribution. The deduction phases out between $123,000 and $143,000, after which none of it will be deductible.
When your income exceeds the limits for a Roth IRA: With a traditional IRA, you can make a nondeductible contribution even if your income exceeds the income limits. But when it comes to a Roth IRA, once you reach the income limits, you can’t make a Roth contribution at all.
In that situation, it makes sense to make a nondeductible contribution to a traditional IRA. It will increase your retirement funding overall and still allow your investment income to accumulate on a tax-deferred basis.
(Note: There is a way to still contribute to a Roth even if you’ve exceeded the income limits. You’ll just have to take the “back door.”)
When a Roth IRA makes more sense
When you’re interested in creating tax diversification within your retirement plans — Traditional IRAs are tax deferred with respect to both contributions and accumulated investment earnings. Roth IRAs, however, are tax free if you are at least 59.5 at the time you make the withdrawals and the plan has been in existence for at least five years.
In this way, Roth IRAs provide you with income tax diversification. While distributions from other retirement plans become taxable upon withdrawal, your Roth IRA funds come to you completely free from federal income taxes. It’s an excellent strategy, especially if you will continue to be in a relatively high marginal income tax bracket in retirement.
When you want to preserve your money past age 73: We’re talking about required minimum distributions (RMDs) here. They kick in at age 73, and they apply to virtually every retirement plan except for the Roth IRA. Simply put, once you reach that age, you’re required to begin taking distributions based on your remaining life expectancy.
Since Roth IRAs have no RMDs, you can build your investment virtually for the rest of your life. This is an excellent way to continue accumulating retirement assets so that you don’t outlive your money. It’s also an excellent way of preserving more of your estate to pass on to your heirs. Only a Roth IRA can do that for you.
If your income tax liability is either low or nonexistent: Even if you can make a deductible traditional IRA contribution, it may not make sense if you have no income tax liability or if you’re in the 10%, 12% or 22% marginal tax rate bracket. Since Roth IRA money can be withdrawn completely free from income taxes, it is a superior retirement plan to a traditional IRA. The last thing that you should want to do is trade a 10% tax savings now for a potentially higher tax rate on withdrawals in retirement, which is exactly what you’ll do if you make a contribution to a traditional IRA.
If you think you may need access to the money before retirement: Since there is no tax deduction from making a Roth IRA contribution, the amount of the contribution can be withdrawn free from income taxes and penalties, even if the withdrawal happens before you turn 59.5. Not so with a traditional IRA if the contributions were tax deductible when made. So if you think you may need the money before retirement, the Roth IRA should be your choice.
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A third option
Even though they’re both IRAs they have so many different provisions that how and when you use them will also be different. So before opening a new account or creating a new retirement plan, consider both types and their effects.
If both seem applicable to your potential situation, there is a third option: You can hedge your bets and maintain both a traditional IRA and a Roth IRA. For example, you could contribute $3,500 to each, or $4,000 to one and $3,000 to the other. (And of course, the total is greater if you're age 50 or over.) That way, you’ll be prepared for whatever tax situations come your way.
Converting IRA to Roth IRA
How to convert an IRA to Roth IRA
To convert a Traditional IRA to a Roth IRA, you’ll first want to ensure you meet the eligibility requirements, including income limits, for a Roth IRA. Next, calculate the tax impact of the conversion since you will owe taxes on the converted amount. (Many large investment houses such as Schwab, Fidelity and Vanguard have conversion calculators.
Once you have a clear understanding of the tax implications, contact your IRA provider to inform them of your intent to convert your Traditional IRA to a Roth IRA. They’ll provide the necessary paperwork to complete the conversion. After submitting the required documents, be prepared to pay the taxes due on the converted amount, which will be included as income for the tax year in which you make the conversion. Finally, update your financial records and tax documents to reflect the conversion accurately.
Consulting with a financial advisor or tax professional is recommended to fully understand the implications before proceeding.
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Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com.
Chris Clark is freelance contributor with MoneyWise, based in Kansas City, Mo. He has written for numerous publications and spent 18 years as a reporter and editor with The Associated Press.
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