Individual Retirement Accounts (IRAs) are one of the most powerful tools for building wealth for retirement — and they come in two main flavors: Traditional and Roth. Both offer tax advantages, but in very different ways.
So which one should you choose?
In this article, we’ll break down how each IRA works, the key differences between them, and how to choose the best one for your financial situation and future goals.
What Is an IRA?
An IRA (Individual Retirement Account) is a tax-advantaged investment account that helps you save for retirement. You can open one on your own — no employer required — and invest in stocks, bonds, ETFs, and more.
There are two main types:
- Traditional IRA
- Roth IRA
Both have the same annual contribution limit (as of 2025):
- $7,000 per year if under age 50
- $8,000 per year if 50 or older (catch-up contribution)
But the tax treatment and withdrawal rules are what set them apart.
How a Traditional IRA Works
A Traditional IRA allows you to contribute pre-tax dollars, which means:
- You may get a tax deduction on your contributions (depending on income)
- Your investments grow tax-deferred
- You pay income tax when you withdraw in retirement
This can reduce your taxable income today, which is useful if you’re in a higher tax bracket now.
Who Benefits Most?
- People who expect to be in a lower tax bracket in retirement
- Those looking for immediate tax relief
- High earners who may not qualify for a Roth
How a Roth IRA Works
A Roth IRA allows you to contribute after-tax dollars, which means:
- No tax deduction up front
- Investments grow tax-free
- Qualified withdrawals in retirement are 100% tax-free
You can also withdraw your contributions (not earnings) at any time, without penalty or taxes — giving you more flexibility.
Who Benefits Most?
- People who expect to be in a higher tax bracket in retirement
- Younger workers with decades of tax-free growth ahead
- Anyone who wants tax-free income in retirement
Key Differences: Traditional vs. Roth IRA
| Feature | Traditional IRA | Roth IRA |
|---|---|---|
| Tax treatment | Deduct now, pay tax later | Pay tax now, withdraw tax-free |
| Eligibility | No income limit for contributions | Income limits apply |
| Contribution limit | $7,000 (2025) | $7,000 (2025) |
| Withdrawal rules | Taxable after age 59½ | Tax-free after age 59½ (if held 5+ yrs) |
| Required distributions | Yes, starting at age 73 | No RMDs during your lifetime |
| Early withdrawal | Penalties for early withdrawals | Contributions withdrawable anytime |
2025 Income Limits for Roth IRA
- Single: Full contribution allowed if income is under $146,000
- Married filing jointly: Full contribution if income is under $230,000
- Contributions phase out above these thresholds
If you’re over the limit, you can still use a backdoor Roth IRA strategy — contribute to a Traditional IRA, then convert to Roth.
How to Choose the Right One
Ask yourself these key questions:
1. Do I want tax benefits now or later?
- Traditional IRA = Tax break now
- Roth IRA = Tax-free income later
2. What will my tax rate be in retirement?
- Lower than now? → Traditional
- Higher or the same? → Roth
3. Will I need access to funds early?
- Roth IRA lets you withdraw contributions anytime
- Traditional IRA withdrawals before age 59½ incur taxes and penalties
4. Do I want to avoid required minimum distributions (RMDs)?
- Roth IRA has no RMDs
- Traditional IRA requires withdrawals starting at age 73
5. Am I eligible for both?
If you qualify based on income, consider contributing to both — this strategy is called tax diversification.
Can You Have Both a Traditional and Roth IRA?
Yes! As long as your total contributions don’t exceed the annual limit ($7,000 total in 2025), you can split it between the two.
Example:
- $3,500 to Traditional IRA
- $3,500 to Roth IRA
This gives you flexibility in retirement, allowing you to manage taxable income by choosing where to draw funds from.
A Strategy for Young Investors
If you’re early in your career:
- Income is likely low → low tax bracket now
- You have decades ahead → compounding tax-free growth
- Best option: Roth IRA
Later in life, as income grows, you can explore Traditional IRAs or other strategies for tax deductions.
A Strategy for High Earners
If you earn above the Roth income limit:
- Use a Traditional IRA (non-deductible) and convert it to a Roth IRA
- This is the Backdoor Roth IRA strategy
Be sure to understand the pro-rata rule and consult a tax advisor if your Traditional IRA has pre-tax funds.
Final Thoughts: The Best IRA Is the One You’ll Use
Choosing between a Traditional and Roth IRA doesn’t need to be complicated — and in many cases, you can benefit from using both. The most important step is to start investing consistently and take advantage of compounding and tax benefits over time.
No matter which you choose, your future self will thank you for starting today.