Roth IRA vs. Traditional IRA: Which Is Better for You?

An individual retirement account (IRA) lets your investments grow without yearly taxes on dividends or gains. There are two main types, Roth and traditional, and the key difference is when you pay income tax: now or in retirement.

Traditional IRA: tax break now

• Contributions may be tax-deductible, lowering this year's taxable income. Whether you can deduct them depends on your income and whether you or your spouse have a retirement plan at work.
• Investments grow tax-deferred.
• Withdrawals in retirement are taxed as ordinary income.
• Withdrawals before age 59½ usually face a 10% penalty plus income tax, with some exceptions.
• You must start taking required minimum distributions (RMDs) in your 70s.

Roth IRA: tax break later

• Contributions are made with money you've already paid tax on; there's no deduction now.
• Investments grow tax-free.
• Qualified withdrawals in retirement are completely tax-free, generally after age 59½ once the account has been open at least five years.
• You can withdraw your contributions (not earnings) at any time without tax or penalty.
• No required minimum distributions during the original owner's lifetime.
• You can only contribute directly if your income is below IRS limits.

How to choose

The main question is whether your tax rate is likely to be higher now or in retirement.

• A Roth often makes sense if you're early in your career, in a lower tax bracket today, or expect your income and tax rate to rise. Tax-free income in retirement also gives you flexibility.
• A traditional IRA often makes sense if you're in a high tax bracket now and expect a lower one in retirement, and you qualify for the deduction.

If you're unsure, many people split contributions between both types to diversify their future tax situation. A tax professional can help with your specific circumstances.

Contribution limits

The IRS sets a combined annual contribution limit across all your IRAs, with a higher "catch-up" limit from age 50. Limits and Roth income thresholds change most years, so check the current figures on IRS.gov before contributing. You also need earned income at least equal to what you contribute.

What to invest in

An IRA is just the account; you still choose the investments inside it. Many investors hold low-cost index funds or ETFs (see ETFs vs. mutual funds) and add to them monthly through dollar-cost averaging. Most online brokers offer both IRA types with no account fees. To see what your savings could grow to, try the retirement calculator.

This article is educational and not tax or investment advice. Tax rules change; check IRS.gov or a tax professional for your situation.

Frequently asked questions

Can I have both a Roth IRA and a traditional IRA?

Yes. You can contribute to both in the same year, but the IRS annual limit applies to your combined contributions across all IRAs.

Can I withdraw money from a Roth IRA early?

You can withdraw your contributions at any time without tax or penalty. Withdrawing earnings before age 59½, or before the account has been open five years, can trigger taxes and penalties, with some exceptions.

Is a Roth IRA better if I'm young?

Often, because many people are in a lower tax bracket early in their careers and their investments have decades to grow tax-free. The right choice depends on your current and expected future tax rates.