Individual retirement accounts (IRAs) come in two main types: traditional and Roth. These IRAs share several similarities but differ in a few notable ways.
Find out how Roth IRAs and traditional IRAs compare and which might be best for you.
| Roth IRA | Traditional IRA | |
|---|---|---|
| Tax benefits |
|
|
| 2023 income limits | Single tax filers with a modified adjusted gross income (MAGI) of less than $153,000 or married couples filing jointly with a MAGI less than $228,000 can contribute | No income limits |
| 2023 contribution limits | $6,500 ($7,500 if you’re over 50) | $6,500 ($7,500 if you’re over 50) |
| Withdrawal penalties / rules |
| Withdrawals before you’re age 59 and a half are subject to taxes and incur a 10% early-withdrawal penalty |
| Required minimum distributions (RMDs) | No RMDs | You must start taking distributions at age 72 (or 73 if you reach age 72 after December 31, 2022) |
Created by the Taxpayer Relief Act of 1997, the Roth IRA is a type of IRA that gives you tax-free withdrawals in retirement. Your contributions to a Roth IRA are categorized as post-tax money, or money on which you’ve already paid taxes. This lets the funds in your Roth account grow tax-free and lets you withdraw your money free of tax when you retire.
With after-tax contributions, you can withdraw your contributions at any time without additional taxes or penalties. You’ve already given Uncle Sam its due, so you’re free to withdraw your contributions at any point. The Internal Revenue Service (IRS) treats investment earnings a little differently, though. You need to reach the age of 59 and a half and have held a Roth IRA for at least five years since your first contribution before you can withdraw earnings without owing tax. The IRS calls these “qualified distributions.”
Because you don’t have to pay taxes on qualified distributions, a Roth IRA may be desirable if you expect to be in a higher tax bracket in retirement. Instead of paying taxes later when you’re making more money, you pay taxes today while your taxable income is lower.
Roth IRAs have income limits that don’t apply to traditional IRAs. If your MAGI is above the threshold set by the IRS each year, you cannot contribute to a Roth IRA directly. We say “directly” because there’s a workaround called a backdoor Roth IRA that lets you fund a Roth IRA even if your income disqualifies you from contributing directly.
If you’re eligible to contribute to a Roth IRA, you can contribute up to $6,500 ($7,500 if you’re age 50 or older) in 2023. This is the same contribution limit that applies to traditional IRAs, and it’s the total you can contribute across all your Roth or traditional IRAs.
Single
| Modified AGI | Contribution |
|---|---|
| < $138,000 | up to the limit |
| ≥ $138,000 but < $153,000 | a reduced amount |
| ≥ $153,000 | zero |
Married filing jointly
| Modified AGI | Contribution |
|---|---|
| < $218,000 | up to the limit |
| ≥ $218,000 but < $228,000 | a reduced amount |
| ≥ $228,000 | zero |
While you can withdraw Roth IRA contributions at any time without penalty, the IRS treats the earnings portion of your account differently. You must pay a 10% penalty if you withdraw any account earnings prior to age 59 and a half and before it’s been at least five years since you first contributed to a Roth IRA. To clarify, even if you’re of retirement age, say 65, you still have to wait five years after you first made a Roth IRA contribution to withdraw earnings penalty-free.
There are some exceptions to this 10% early-withdrawal penalty. These include using the funds to pay a qualified higher education expense or to make payments necessary to prevent eviction from your primary residence. You can also withdraw up to $10,000 penalty-free before you’re 59 and a half to make a first-time home purchase. Other exceptions are available as well.
Congress created the traditional IRA in 1974 as a way to give workers without an employer-sponsored retirement plan a tax-advantaged way to save for retirement. It’s the original IRA, and it lets you deduct your contributions and defer taxes.
Depending on your MAGI and whether you’re covered by a retirement plan at work, your contributions to a traditional IRA may be tax-deductible. In other words, if you contribute $3,000 this year to a traditional IRA and qualify for a full deduction, you can deduct the $3,000 from your taxable income when you file taxes in April. This lowers your taxable income for the year, which lowers how much you’ll need to pay in taxes.
Aside from the possible tax deduction, traditional IRAs let you delay paying taxes on your contributions and any earnings growth over the years until you reach retirement. You fund a traditional IRA with pre-tax dollars — money that has yet to be taxed — so you’ll owe taxes when you withdraw the money later on.
Opposite of the Roth IRA, a traditional IRA may be a good option if you expect to be in a lower income tax bracket in retirement. You delay paying taxes today while your taxable income is higher and pay the taxes later when you’re in a lower tax bracket. The traditional IRA may also be appealing if you want an immediate tax break, as you’re allowed to deduct contributions in the year you make them.
The traditional IRA has no income limits, so you can contribute to this account no matter your MAGI. The most you can contribute to both your traditional and Roth IRAs in 2023 is $6,500 ($7,500 if you’re age 50 or older) in total.
While there’s no income limit, you need to qualify to deduct your contributions from your taxable income. Eligibility depends on your MAGI, filing status and whether you have a retirement plan at work.
Single
| Have a workplace retirement plan? | Modified AGI | Deductible amount |
|---|---|---|
| Yes | ≤ $73,000 | Full deduction up to the limit |
| Yes | > $73,000 but < $83,000 | Partial deduction |
| Yes | ≥ $83,000 | No deduction |
| No | Any amount | Full deduction up to the limit |
Married filing jointly or qualifying widow(er)
| Have a workplace retirement plan? | Modified AGI | Deductible amount |
|---|---|---|
| Yes, both spouses | ≤ $116,000 | Full deduction up to the limit |
| Yes, both spouses | > $116,000 but < $136,000 | Partial deduction |
| Yes, both spouses | ≥ $136,000 | No deduction |
| Yes, one spouses | ≤ $218,000 | Full deduction up to the limit |
| Yes, one spouses | > $218,000 but < $228,000 | Partial deduction |
| Yes, one spouses | ≥ $228,000 | No deduction |
| No, neither spouse | Any amount | Full deduction |
The 5-year withdrawal rule that applies to Roth IRAs does not apply to traditional IRAs. You only incur a 10% early-withdrawal penalty if you withdraw funds before you’re age 59 and a half. The same exceptions to the early-withdrawal penalty for Roth IRAs also apply.
Traditional IRA owners can’t let the money sit in their account indefinitely. Starting at age 72 (73 if you reach age 72 after December 31, 2022), you must begin taking withdrawals each year. If you don’t withdraw the full amount of your RMD by the due date, the amount not withdrawn is subject to a 25% excise tax.
You can calculate the minimum you must withdraw by taking your account balance as of December 31 of the previous year and dividing it by the appropriate distribution period noted on the IRS’s “Uniform Lifetime Table.”
Yes, you can have both a traditional and a Roth IRA and many people do — especially if you’re unsure of your future tax situation. Financial planners call having both a form of tax diversification, because you’ll have both taxable and tax-free withdrawal options in retirement.
While you can have both a traditional and a Roth IRA, you can only contribute $6,500 in total in 2023.
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