Roth IRA vs. Traditional IRA: Understanding Your Options:

By: Trevor Mann

Published on: 04/25/2025

When it comes to retirement planning, Individual Retirement Accounts (IRAs) are some of the most powerful tools for building wealth. Among the most popular IRAs are the Roth IRA and Traditional IRA. Both offer distinct advantages depending on your current financial situation and future goals. To make an informed decision about which IRA is right for you, it’s essential to understand the pros and cons of each option.

Roth IRA vs. Traditional IRA

What is a Roth IRA?

A Roth IRA is a retirement account that allows you to contribute after-tax income, which means you pay taxes upfront. The big benefit is that your investments grow tax-free, and qualified withdrawals in retirement are also tax-free.

Key Features of a Roth IRA:

Contributions: Made with after-tax dollars (no tax deduction for contributions).
Tax Treatment: Tax-free growth, tax-free withdrawals in retirement (if certain conditions are met, such as the 5-year seasoning rule).
Withdrawals: No required minimum distributions (RMDs) during your lifetime.
Eligibility: Your eligibility to contribute to a Roth IRA phases out at higher income levels ($150,000 annually for single filers and $236,000 annually for married filing jointly for 2025).
Contribution Limits: For 2025, the contribution limit is $7,000 ($8,000 if you’re 50 or older), as long as your income is within the threshold.

What is a Traditional IRA?

A Traditional IRA allows you to contribute pre-tax income, meaning your contributions may be tax-deductible in the year you make them. The money grows tax-deferred, and you will pay taxes on your withdrawals in retirement.

Key Features of a Traditional IRA:

Contributions: Made with pre-tax dollars (often tax-deductible, depending on income and retirement plan participation).
Tax Treatment: Tax-deferred growth, taxes owed upon withdrawals. You pay no tax now but when you take withdrawals, you will have to pay ordinary income taxes on the FULL amount of the withdrawal.
Withdrawals: Required Minimum Distributions (RMDs) start at age 73 (as of 2025) and in 2033, the RMD age is currently set to go up to age 75.
Eligibility: Available to anyone with earned income, but tax deductibility phases out at higher income levels if you or your spouse are covered by a retirement plan at work ($79,000 for single filers and $126,000 for married filing jointly. Remember – you are eligible for a Traditional IRA contribution at any income level, but what phases out is your ability to deduct this income from your taxes).
Contribution Limits: The same as Roth IRAs—$7,000 ($8,000 if you’re 50 or older) for 2025.

Pros and Cons:

Roth IRA Pros:

Tax-free growth and withdrawals (if qualified). This is a fantastic way to hedge your retirement against higher taxes down the road and what we would recommend for most people!
No RMDs, allowing your money to continue growing tax-free. This keeps you in control longer as your retirement partner, Uncle Sam, was bought out a long time ago.
Flexible withdrawal rules: You can withdraw contributions anytime without penalties or taxes.

Roth IRA Cons:

No immediate tax deduction for contributions. However, when thinking about your retirement plan, think long-term, not short-term! The benefits down the road will likely outweigh not getting a deduction today.
Contributions are limited by income (no age restrictions anymore). You must have earned income to be eligible to contribute to your ROTH IRA and if you make too much income, you may be phased out of being able to contribute to your ROTH IRA. Knowing these limits is important to avoid any penalties.

Traditional IRA Pros:

Contributions may be tax-deductible in the year you contribute. This tax deduction is essentially a loan, and you are saying to Uncle Sam, “I will pay taxes on this money later rather than right now”.
No income limits for contributions, making it available to most people, as long as you have earned income.
Useful for those who expect to be in a lower tax bracket in retirement. Remember – while you may have less income in retirement, you may still be paying more in taxes if tax policy changes.

Traditional IRA Cons:

Withdrawals are taxed as ordinary income, which could be a disadvantage if your tax rate rises in retirement.
RMDs start at age 73, potentially requiring you to withdraw more than you want or need. You will have Uncle Sam as your silent partner throughout retirement and he could take a bigger piece of the pie every year.
Early withdrawals before age 59½ are subject to penalties. There is a 10% penalty for accessing any amount of your traditional IRA funds. Whether it’s your contributions or your growth, the 10% penalty will apply to any non-qualified distributions you make before age 59 1/2 . There are some exclusions to this rule where you can take a qualified distribution before age 59 ½ and not be subjected to the 10% penalty. Make sure you know before taking a distribution!

Which One Should You Choose:

Choosing between a Roth IRA and a Traditional IRA depends on several factors:

Current Tax Situation vs. Future Tax Situation: If you believe your tax rate will be higher in retirement, a Roth IRA may be more beneficial. If you anticipate a lower tax rate in retirement, a Traditional IRA might be the better choice. Keep in mind – there is no guarantee your taxes will be lower in retirement even though you potentially have less income. Marginal tax brackets can go higher or lower without any warning – so plan accordingly! More often than not, we recommend maxing out your Roth IRA if you can. Exploring other options such as a backdoor Roth IRA contribution as well can be just as beneficial. We recommend asking a Financial Advisor for help with this.
Flexibility: If you need access to your contributions before retirement or want to avoid RMDs, the Roth IRA offers more flexibility.
Tax Deductions: If you’re looking for an immediate tax break and don’t mind paying taxes later, a Traditional IRA could be the way to go.

Both the Traditional and Roth IRA have their place in retirement planning. Some people even choose to invest in both types to diversify their tax exposure in retirement. If you choose to do both, keep in mind your total contribution limit is still $7,000 ($8,000 if 50 or older). It’s always a good idea to consult with a financial advisor to help you make the right decision for your retirement strategy.

Planting the correct seeds as early as possible will result in the best long-term crops and retirement success.

By understanding the core differences between Roth and Traditional IRAs, you can make a more informed decision about which one will help you achieve your long-term financial goals.