Traditional IRA vs. Roth IRA. What's the difference? (updated for 2025)

Individual Retirement Accounts (IRAs) are a popular way for people to save for retirement. What you need to know is that not all IRAs are created equal. Two of the most common types of IRAs are the Traditional IRA and the Roth IRA. While both types of IRAs provide tax benefits for retirement savings, they differ in several key ways. In this article, we will discuss the benefits and the key differences between the Traditional IRA and Roth IRA.

Quick Fact: For the 2024 and 2025 tax year, the contribution limit for a Traditional IRA and a Roth IRA is $7,000 or $8,000 if you are age 50 or older.

Traditional IRA Basics

Contributions

A Traditional IRA is a type of retirement savings account that allows you to make pre-tax contributions. This means that the contributions you make to your Traditional IRA are tax-deductible. The money in the account grows tax-deferred, which means that you do not pay taxes on the growth of your investments until you make withdrawals.

One of the main benefits of a Traditional IRA is that it can lower your taxable income. For example, if you make a contribution of $6,000 to your Traditional IRA and are in the 25% tax bracket, you could save $1,500 in taxes for that year.

Withdrawals

Another benefit of a Traditional IRA is that it provides a source of income in retirement. You can start making withdrawals from your Traditional IRA once you reach age 59 1/2. You are required to start taking distributions by age 73 which is called your required minimum distribution or RMD for short. The age for the RMD will be updated again in 2033 to age 75. It is important to note that withdrawals from a Traditional IRA are taxed as ordinary income.

Early withdrawals from an IRA are imposed with a 10% penalty unless your withdrawal meets one of the exceptions. This penalty serves as a deterrent, encouraging individuals to preserve their retirement savings until they reach the age of 59½, which is when they can begin to withdraw funds without incurring additional charges.

Roth IRA Basics

Contributions

A Roth IRA, is a type of retirement savings account that allows you to make contributions with after-tax dollars. This means that you pay taxes on the money you contribute to your Roth IRA, but your investments grow tax-free.

Withdrawals

The biggest highlight of a Roth IRA is that your withdrawals in retirement are tax-free. These tax free withdrawals can be particularly beneficial for those who expect to be in a higher tax bracket in retirement. By paying taxes on the contributions now, you can avoid paying taxes on the growth of your investments and withdrawals in the future.

Another benefit of a Roth IRA is the flexibility it provides in retirement. With a Roth IRA, you can withdraw your contributions at any time without incurring any taxes or penalties. This can be particularly beneficial in an emergency situation where you need access to funds.

There is a 5 year rule that many retirement savers overlook. In order for the earnings (interest) to be withdrawn tax free, at least 5 years must have passed from your first contribution.

Unlike Traditional IRAs, Roth IRAs do not have required minimum distributions (RMDs). This means that you can leave the money to grow tax-free for as long as you like. This can make Roth IRAs attractive for people who want to pass on their savings to their heirs.

Differences between Traditional IRAs and Roth IRAs

Taxation

The biggest difference between Traditional IRAs and Roth IRAs is the way they are taxed. With a Traditional IRA, contributions are tax-deductible and withdrawals are taxed as ordinary income. With a Roth IRA, contributions are made with after-tax dollars, and withdrawals in retirement can be tax-free.

Required Minimum Distributions (RMDs)

Traditional IRAs are subject to RMDs, which means that you must start taking distributions from your account by age 73. Roth IRAs are not subject to RMDs, which means that you are not required to take distributions.

Eligibility

Another difference between the two types of IRAs is the eligibility for contributions. Your ability to make tax-deductible contributions to a Traditional IRA may be limited if you or your spouse are covered by an employer-sponsored retirement plan. If you are covered, there are certain income limits that may affect the deductibility of the contributions. Your ability to make contributions to a Roth IRA may be limited based on your income level alone.

To determine your eligibility, please consult with your tax professional.

Traditional IRA vs Roth IRA. Which IRA is Right for You?

There is no simple answer as to which Individual Retirement Account (IRA) would be better for your specific financial situation, as the choice can depend on a variety of personal circumstances and financial goals. Each type of IRA, whether it be a Traditional IRA, Roth IRA, or even a SEP IRA for self-employed individuals, comes with its own set of rules, tax implications, and benefits that can significantly impact your retirement savings strategy.

Schedule a no-cost consultation with a financial advisor to determine which IRA suits you best. The advisor can provide tailored advice based on your unique circumstances. Exploring your options and making informed decisions is crucial. Click below to schedule your free consultation.

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For educational purposes only. Not to be relied upon as financial, tax, or legal advice. 

This information was obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness, or fairness. We have relied upon and assumed without independent verification the accuracy of all information available from public sources.