What's the Difference Between a Roth IRA and a Traditional IRA?


Workplace retirement accounts like 401(k)s aren’t the only way to save for retirement. You can also stash your cash in an Individual Retirement Account (or IRA).

Two of the most popular choices are Roth and traditional IRAs. (A SEP-IRA is another option if you’re self-employed.)

What’s the difference between them? Mostly, taxes.

With a traditional IRA, you may be able to deduct your contributions and lower your tax bill now, but you’ll pay taxes on the money you withdraw in retirement. With a Roth, you can’t deduct your contributions but you won’t be taxed on your withdrawals in retirement.

So, generally speaking, if you expect to be in a higher tax bracket when you withdraw the money, a Roth is the better choice. If you think your tax rate will be lower, a traditional IRA probably makes more sense.

But there are also other key factors to consider—like whether you’re eligible to reap the full benefits of the accounts in the first place.

To contribute the maximum amount to a Roth IRA, you must earn less than $122,000 in 2019, or $193,000 if you’re married and filing jointly. There are no income limitations to contribute to a traditional IRA, but to claim the full tax deduction for 2019, your adjusted gross income must be less than $64,000, or $99,000 for married couples filing jointly, if you’re also covered by a retirement plan at work. (If neither you nor your spouse has access to a work plan, there are no income limits.)

Once you reach the year you turn 70½, you can no longer contribute to a traditional IRA—and you must start taking minimum withdrawals.

Roth IRAs have no age restrictions on making contributions. You can also withdraw the contributions you made anytime without having to pay taxes or penalties. But if you dip into the earnings portion of the account before age 59½ or before it’s been open for at least five years, you may have to pay taxes and a 10-percent early withdrawal penalty. (In certain situations, like buying a first home or paying for qualified education expenses, you can break the rule and avoid the penalty by tapping either your Roth or traditional IRA.)

This story was updated in January 2019.

This information is being provided for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. You should consult your tax or legal adviser regarding such matters.