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Roth and traditional individual retirement accounts (IRAs) both offer tax advantages and the opportunity to invest for your future. The main difference between these two types of retirement savings accounts is when you pay taxes on contributions. Money in traditional IRAs grows tax-deferred until you withdraw it and Roth IRAs are funded with after-tax dollars so there’s no tax on withdrawals. Learn more about the key differences and similarities between these accounts to help determine which suits your needs.
How Roth IRAs and Traditional IRAs Are Similar
Roth IRAs and traditional IRAs are both tax-advantaged investing accounts that allow you to save money specifically for retirement. These are accounts that you open on your own — hence the “individual” in their names — as opposed to through an employer like you would with a 401(k). That means that you’re not limited to only investing in what a plan sponsor makes available; you can invest in a wide range of stocks, bonds, exchange-traded funds, mutual funds and more.
| Fast Fact |
| The average IRA balance at Fidelity Investments in the second quarter of 2023 was $113,800, according to the firm. |
The limit for how much you can contribute is the same for each account: $7,000 in 2024 (or $8,000 if you’re over age 50).
How Roth IRAs and Traditional IRA Are Different
The main difference between Roth IRAs and traditional IRAs is how they are taxed. With Roth IRAs, your contributions are made with after-tax dollars and your withdrawals later in life are tax free. Because of this, Roth IRAs work especially well for people who will be in a higher tax bracket when they withdraw the money than they are when they contribute (though that’s difficult to predict).
Contributions made to traditional IRAs, on the other hand, are “pre-tax” meaning your money can grow tax-deferred. You’ll only have to pay taxes on these funds once you start withdrawing them as you near or are in retirement.
| Did You Know? |
| The Secure 2.0 Act introduced penalty-free rollovers from 529 college savings plans to Roth IRAs, which may come in handy for parents with leftover funds in their kids’ 529 plans. However, there are some limitations. For example, the lifetime rollover limit is $35,000 and the 529 account must be open for at least 15 years. |
Source: Senate Committee on Finance
In short, Roth IRAs provide a delayed benefit while traditional IRAs give you a more immediate tax benefit.
Another key difference between these two types of accounts is their income restrictions. Anyone with earned income can contribute the maximum $7,000 (or $8,000 if you’re over age 50) to a traditional IRA, no matter their income (though there are income limits for how much of your contributions you can deduct). Roth IRAs require your income to be below a specific threshold to contribute the full amount.
In 2024, if your modified adjusted gross income (MAGI) is less than $146,000 and you’re a single filer, you can contribute the full amount to your Roth IRA. If your MAGI is more than $146,000, but less than $161,000, you can only contribute a reduced amount, and if your income is higher than $161,000, you’re not eligible to contribute to a Roth IRA at all, according to the IRS.
Traditional IRAs also require you to take required minimum distributions (RMDs) while Roth IRAs do not (unless the Roth IRA is inherited). RMDs, which are set by the IRS, are the minimum amounts you’re required to withdraw from your retirement accounts each year once you hit a certain age. If you have a traditional IRA, you are required to take RMDs starting at age 73.
If you opt to withdraw your money before age 59 ½, you’ll face consequences — but those consequences are different for Roth IRAs and traditional IRAs. With a Roth IRA, you can withdraw the money you contributed at any time tax- and penalty- free. But you may face a 10% penalty on withdrawing earnings (the money you made on those contributions) early depending on whether the account has been open for five years, and what you are using the money for. If you withdraw from a traditional IRA before age 59 ½, you’ll face income taxes and a 10% penalty (with some exceptions).
Roth IRA vs. traditional IRA
| Roth IRA | Traditional IRA | |
| Contributions are made with: | After-tax dollars | Pre-tax dollars |
| Contributions grow: | Tax-free | Tax-deferred until funds are withdrawn |
| Contribution eligibility: | Only for those with an income below a specific threshold | No eligibility limits based on income |
| Required minimum distribution (RMD): | None (unless the Roth IRA is inherited) | You must start taking the minimum withdrawal amount at age 73 |
| Withdrawal Penalty: | Withdrawals are penalty- and tax-free if you’ve had the Roth IRA for five years and you’re 59 ½ years old or older | Penalty free if you’re at least 59 ½ years old, but still taxed |
Sources:
Internal Revenue Service. (2024, February 21). Retirement Plan and IRA Required Minimum Distributions FAQs. Retrieved from https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs
Internal Revenue Service. (2024, January 8). 401(k) Limit Increases to $23,000 for 2024, IRA Limit Rises to $7,000. Retrieved from https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000
Fidelity Investments. (2023, August 17). Fidelity Q2 2023 Retirement Analysis: Retirement Account Balances Move Up For Third Straight Quarter. Retrieved from https://newsroom.fidelity.com/pressreleases/fidelity–q2-2023-retirement-analysis–retirement-account-balances-move-up-for-third-straight-quarte/s/f25eecbb-d361-44d8-a042-d34fe500f37b
Pon, L. (2023, July 26). The New 529 Rollover to Roth IRA. Retrieved from https://www.journalofaccountancy.com/news/2023/jul/the-new-529-rollover-roth-ira.html
Senate Committee on Finance. (2022). SECURE 2.0 Act of 2022. Retrieved from https://www.finance.senate.gov/imo/media/doc/Secure%202.0_Section%20by%20Section%20Summary%2012-19-22%20FINAL.pdf
