PlayInfoBox

Home /Investing /Traditional vs. Roth IRA: How US Individual Retirement Accounts Work

Traditional vs. Roth IRA: How US Individual Retirement Accounts Work

An IRA is a personal retirement account you open yourself, separate from any employer plan. Here is how the two main types differ.

An account you open yourself, not through an employer

Unlike a 401(k), which is sponsored by an employer, an Individual Retirement Account (IRA) is opened directly with a brokerage or bank by an individual, and anyone with earned income can generally contribute regardless of whether their employer offers a retirement plan.

Traditional IRA: tax break now, taxed later

Contributions to a Traditional IRA may be tax-deductible in the year you contribute, depending on your income and whether you or a spouse is also covered by a workplace plan; withdrawals in retirement are then taxed as ordinary income.

Roth IRA: no tax break now, tax-free later

Roth IRA contributions are made with after-tax money, so there is no upfront deduction, but qualified withdrawals of both contributions and earnings in retirement are generally tax-free.

One combined annual contribution limit

The IRS sets a single annual contribution limit that applies across all of your IRAs combined, whether you split contributions between a Traditional and a Roth IRA or put everything into one. This limit is periodically adjusted and includes a higher "catch-up" allowance for savers age 50 and older.

Roth IRA contributions phase out at higher incomes

Roth IRA eligibility phases out above certain modified adjusted gross income (MAGI) thresholds that differ by filing status, and the exact thresholds are adjusted periodically. Traditional IRAs have no income limit on the ability to contribute, though the tax deduction can be limited depending on income and workplace coverage.

Required withdrawals apply differently to each

Traditional IRAs are generally subject to required minimum distributions (RMDs) starting at a certain age set by current law, while Roth IRAs held by the original owner are not subject to RMDs during their lifetime under current rules.

Early withdrawal rules and exceptions

Withdrawing earnings before age 59Β½ generally triggers a 10% penalty plus income tax on a Traditional IRA, with a list of specific exceptions such as a first-time home purchase up to a lifetime cap. Roth IRAs allow withdrawal of your own contributions (not earnings) at any time without penalty, since you already paid tax on that money.

The numbers for tax year 2026

For tax year 2026, the IRS lists a combined IRA contribution limit of $7,500 across all Traditional and Roth IRAs, or your taxable compensation for the year if that is less. People age 50 or older can contribute $8,600, which includes a catch-up amount of $1,100. These figures change over time, often rising in step with inflation, so confirm the current-year amounts on irs.gov before contributing.

Earned income and contribution deadline

You need taxable compensation, such as wages or self-employment income, to contribute, and you cannot contribute more than you earned. A married person with little or no income may be able to contribute through a spousal IRA based on the other spouse's earnings. Contributions for a given tax year can generally be made until the tax filing deadline of the following spring, which gives people extra months to decide.

Roth ordering rules and the five-year clock

Withdrawals from a Roth IRA are treated as coming first from your contributions, then from converted amounts, and last from earnings. That ordering is why your contributions can be taken out without tax or penalty. For earnings to come out tax-free as a qualified distribution, the account generally must have been open at least five tax years, and you must also meet a condition such as being age 59Β½ or older, disabled, or using a first-home exception.

Roth conversions

You can move money from a Traditional IRA into a Roth IRA through a conversion. The converted amount is generally taxed as ordinary income in the year of conversion, because it was never taxed before. There is no income limit on conversions, but converting a large amount can push you into a higher bracket, and the rules for people holding both pre-tax and after-tax IRA money are more complicated, so many people consult a tax professional first.

RMD age under current law

Under current law, required minimum distributions from a Traditional IRA begin at age 73 for people born between 1951 and 1959 and at 75 for people born in 1960 or later. Roth IRAs have no RMDs for the original owner, and Roth accounts inside employer plans are also exempt from lifetime RMDs starting in 2024. Missing an RMD triggers a penalty, so it is worth setting a reminder when the time approaches.

An IRA is a container, not an investment

Opening an IRA does not decide what you own. Inside the account you can usually hold stocks, bonds, mutual funds, ETFs, and cash, depending on the provider. Fees, fund choices, and asset allocation matter as much as whether the account is Traditional or Roth, and people sometimes make the mistake of leaving contributions in a cash sweep without ever investing them.

What happens to an IRA after death

You name beneficiaries on the account, and those designations generally override what a will says. Most non-spouse beneficiaries must empty an inherited IRA within ten years under current rules, while spouses have additional options. Inherited Roth IRAs are still tax-free in most cases, but they follow their own distribution timeline.

Which one is "better" depends on your tax situation

The core trade-off is timing: a Traditional IRA gives you a tax break today in exchange for taxable withdrawals later, while a Roth IRA gives up today's tax break for tax-free withdrawals later. A common rule of thumb some financial educators mention is that a Roth may favor people who expect to be in a higher tax bracket in retirement than they are now, and vice versa for a Traditional IRA, but this is general guidance, not individual advice.

An IRA and a 401(k) are not mutually exclusive

Many people contribute to both an employer 401(k) and a personal IRA in the same year, since they have separate contribution limits from each other. A common strategy mentioned in general financial education is to contribute enough to a 401(k) to capture any employer match first, then consider an IRA for additional retirement savings.

A few situations that change the answer

People early in their careers with low income often lean toward a Roth because their current tax rate is low. Those in peak earning years may value the Traditional deduction more. People who expect to need money before retirement may like the Roth's flexible access to contributions. Those close to Roth income limits might look at conversions as an alternative. None of these is a rule, and splitting contributions between the two types is a common way to diversify the tax treatment of future withdrawals.

General information, not tax advice

Tax rules change, and your situation depends on your income, filing status, state, and other accounts. This page explains the basic mechanics only. Review IRS publications or speak with a qualified tax professional before making decisions that involve large contributions, conversions, or withdrawals.

Frequently Asked Questions

What are the current IRA contribution limits?

For tax year 2026, the IRS lists $7,500 across all your Traditional and Roth IRAs combined, and $8,600 if you are 50 or older. Limits are adjusted from time to time, so check irs.gov for the figure that applies to the year you are contributing for.

Can I contribute to an IRA if I already have a 401(k) at work?

Yes, having a workplace plan does not prevent you from opening and contributing to an IRA. It can, however, affect whether your Traditional IRA contribution is tax-deductible, depending on your income.

Is a Roth IRA the same as a Roth 401(k)?

No. Both share the same after-tax, tax-free-withdrawal concept, but a Roth IRA is a personal account with its own separate contribution limit and income restrictions, while a Roth 401(k) is an employer-sponsored option inside a 401(k) plan with the 401(k)'s own limits and no income restriction.

What if my income is too high for a Roth IRA?

You can still contribute to a Traditional IRA, although the deduction might be reduced. Some people then convert to a Roth, but conversions are taxable and have additional rules, so it is worth getting guidance before doing it.

Can I withdraw from an IRA for a home purchase?

There is an exception to the early-withdrawal penalty for first-time homebuyers, up to a lifetime limit of $10,000. Income tax may still apply on a Traditional IRA withdrawal, and Roth earnings follow their own conditions.

When is the deadline to contribute for a given year?

Generally, you have until the tax filing deadline of the following year, not including extensions. Tell your provider which tax year the contribution is for, since a deposit made in early spring can be credited to either year.