If the complexity of the Roth IRA vs traditional IRA decision is preventing you from opening an account, just know this: There are no bad choices here. Each rewards you with tax breaks for saving in the future and offers easy access to the types of investments that will help your nest egg grow.
That said, there are rules — rules about who’s allowed to use which type, rules about contribution amounts, withdrawal rules, and taxes, taxes, taxes. The combination of tax law and investing makes the Roth vs traditional IRA debate inherently confusing.
Don’t let analysis paralysis keep you on the retirement savings sidelines. Simply choosing one and getting started is a win. This HerMoney Guide to Roth and traditional IRAs deconstructs the most important rules to help you decide which type of IRA — or combination of both! — is best for you.
What these IRAs have in common
Setting aside differences for the moment, here are the ways Roth and traditional IRAs are the same:
- Contribution limits: For the 2024 tax year, those who are under the age of 50 can contribute $7,000 and those age 50 and older can contribute up to $8,000 to either a Roth or traditional IRA. For the 2025 tax year, you’re allowed to contribute up to $7,000 (or $8,000 if you’re age 50 and older) to either type of IRA. Can’t decide? You can save money in both types as long as your total IRA contributions don’t exceed IRS annual limits.
- Contribution deadline: You have until the day your taxes are due (April 15, 2025 for the 2024 tax year) to set up and fund your Roth and/or traditional IRA for the previous year.
- Investment choices: Roth and traditional IRAs are not themselves investments: They are empty accounts (with magical tax-deflecting properties) to hold your money. You — or your financial pro — choose how to invest it. Both types of IRAs can handle everything from individual stocks, mutual funds, ETFs, bonds, Certificates of Deposit and cash.
- How investments are taxed along the way: As long as your money remains in an IRA, you won’t owe taxes on any investment growth (e.g. earnings or dividends) like you would in a regular investment account. That’s one of the tax protections that makes both Roth and traditional IRAs a smart places for your long-term savings.
- Penalty-free withdrawals: 59 ½ is the magic half-birthday when the IRS allows you to start withdrawing money from both Roth and traditional IRAs. Before then, withdrawals may be subject to income taxes and a 10% early withdrawal penalty. However, there are situations (discussed below) where you can avoid the penalties if you tap into your account before it’s fully cooked.
- No minimum funding requirement: The IRS caps how much you can save in an IRA each year, but there’s no obligation to contribute the full amount. In fact, many financial institutions allow you to start funding an account with whatever change is jangling around at the bottom of your purse.
The main difference: How and when you’re taxed
The biggest difference between the traditional and Roth IRAs is the tax break. A traditional IRA offers a tax deduction on contributions (the Roth doesn’t). A Roth offers tax-free withdrawals (withdrawals from a regular IRA face income taxes).
You could make a decision about which IRA is best for you based on that single piece of information. For example: If you know you’ll be in a higher tax bracket in retirement than you are now, the Roth’s tax-free withdrawals are more valuable to you. If you’re in a high tax bracket right now or predict your tax rate will be lower in retirement, a traditional IRA is a good choice.
For those of us without a reliable Tarot reading of our future tax bracket, the decision requires knowing what other ways these IRAs differ from each other.
Eligibility rules
The IRS is the bouncer at the front door of the IRA contribution club. How much you’re allowed to shield from taxes and when you get that tax break is based on your tax situation — your tax filing status, income and other factors. (Answer a few questions and this Fidelity IRA calculator will tell you which type of IRA is in the running for you.)
Traditional IRA contribution rules:
Anyone with earned income can contribute to a traditional IRA. The question is: How much of that contribution is deductible? (Remember: traditional IRA contributions reduce your taxable income on a dollar-for-dollar basis up to a maximum of $7,000 and $8,000 if you’re 50 or older.)
How much you’re eligible to deduct from this year’s taxes is based on three things: Your tax filing status (if you file as single or head of household, married filing jointly or married filing separately), your modified adjusted gross income (MAGI), and whether you or your spouse is covered by a retirement plan at work.
Roth IRA contribution rules:
There’s no question about how much of your Roth IRA contribution you’re allowed to deduct from your taxes — because there is no upfront tax deduction. The tradeoff is that your withdrawals down the road are tax-free.
The Roth eligibility question is more straightforward. Am I even allowed to contribute, and if so, how much? Unlike with a traditional IRA, it doesn’t matter whether or not you (or your spouse, if you’re married) are covered by a workplace retirement plan. The answer is based solely on your income. Or, more specifically, your modified adjusted gross income (MAGI).
At some point on the MAGI sliding scale, the amount you can contribute starts phasing out. (PS: If you’re barred completely from saving in a Roth, there’s a workaround! It involves converting a traditional IRA into a Roth IRA — aka the “backdoor” Roth.)
Withdrawal rules
The differences between the Roth vs traditional IRA are on full display when you switch from saving to spending. The IRS treats withdrawals (aka distributions) very differently depending on which account you dip into. Uncle Sam also has distinct rules for early withdrawals. Spoiler alert: If you think you’ll need to tap your retirement savings early (as in before age 59 ½), a Roth IRA is the friendlier choice.
Traditional IRA withdrawal rules
You can only dodge paying taxes for so long with a traditional IRA. When you start taking distributions, your withdrawals — of both earnings and tax-deferred contributions — act as income. The IRS will tax that money at your going income tax rate.
Another withdrawal rule that applies only to traditional IRAs: The IRS requires you to start taking yearly distributions (required minimum distributions, or RMDs) when you reach age 73. And, yeah, there’s a penalty for failing to do that, too. Because IRS.
Uncle Sam gets really cranky if you crack open a traditional IRA before age 59 ½. In addition to income taxes you’ll owe a 10% early withdrawal penalty.
There are some exceptions to the early withdrawal rules. While you’ll still pay income taxes, you can avoid the 10% penalty if the money is used for certain things. Those are: qualified higher education expenses (for yourself or an immediate family member), a first-time home purchase, certain medical expenses, if you’re a qualified reservist, if you become permanently disabled and if you become a parent through birth or adoption, among other exceptions.
Roth IRA withdrawal rules
Withdrawals from a Roth IRA after age 59 ½ are completely tax-free! That tax-free status applies to both contributions and your investment earnings.
The Roth IRA also has no rules that require you to start taking distributions at age 73. You can leave your money in the account indefinitely, which makes it a great spot for money you want to leave your heirs.
On early withdrawals, the Roth IRA has one huge advantage over its traditional sibling. You can withdraw your contributions — not earnings (hands off those!) — for any reason at any time. And you won’t have to pay taxes or an early withdrawal penalty. Don’t even side eye earnings, though. Unqualified withdrawals of earnings will be met with a tax bill and that 10% early withdrawal penalty.
Like the traditional IRA, there are exceptions to the “you touch, you pay out the nose” rules. You can avoid taxes and an early withdrawal penalty on earnings if your account has been open for five or more years and the money is used for a first-time home purchase, you’ve become disabled, or a beneficiary is withdrawing money after you’ve died, as well as other exceptions.
The bottom line
In a world where women face so many obstacles to securing their financial futures, putting money away is a must, especially if you’re behind in saving for retirement. Tax-advantaged accounts like Roth and traditional IRAs will help you get the most out of every dollar you tuck away.
Knowing the differences between a Roth vs traditional IRA — the upfront tax deduction you get with a traditional IRA or tax-free withdrawals offered by the Roth — will help you decide which one is best for your situation.
Don’t be put off by the details. Like we said at the top of this guide, both are great retirement savings options. Even if you resort to throwing a dart to decide, merely making that choice to sock away some money in an IRA — whatever you can afford to start — is a move that you won’t regret.
Roth vs. Traditional IRA Comparison
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