Roth vs. Traditional IRAs: Which Is Right for You?

Trying to choose between a traditional individual retirement account (IRA) and a Roth IRA? They both offer tax-advantaged ways to save for retirement, so your decision may come down to a couple simple questions: What flavor of tax advantage would you prefer? Does it make more sense to put off paying taxes on your savings until you retire, or should you just get it over with and pay today so you don't have to do so later?

To be clear, this oversimplifies things quite a bit—these accounts come with various eligibility rules and contribution limits that could affect your choice—but doing some basic tax planning should get you in the right head space for making a final call.

A traditional IRA is an individual retirement account that allows you to make contributions on a pre-tax basis (if certain requirements are met) and pay no taxes until you withdraw the money. Starting at age 73, you’ll have to start taking required minimum distributions (RMDs) annually from your traditional IRA. Those withdrawals are taxed as ordinary income; however, if you withdraw the money before age 59½, you may also be subject to a 10% early withdrawal penalty and state-tax penalties. 

In contrast, Roth IRA contributions are made with after-tax dollars, and you won't have annual RMDs. You can withdraw contributions to a Roth account anytime, tax- and penalty-free. But you can only withdraw your earnings tax-free after age 59½ as long as you've held the account for at least five years or you meet certain other conditions¹—otherwise, you may have to pay taxes and penalties on them.

The maximum amount you can contribute in 2023 across all your IRAs—traditional or Roth—is $6,500 ($7,500 if you're age 50 or older). However, some rules affect IRA contributions and deductibility.

To start, if neither you nor your spouse is offered a retirement plan by an employer, there's no income limit for contributing to a traditional IRA, and your contribution is fully deductible. However, if either of you participates in a workplace retirement plan, deductibility phases out depending on your filing status and income.

With Roth IRAs, you can only contribute if your income meets certain limits.

A general guideline is that if you think your tax bracket will be higher when you retire than it is today, you may want to consider a Roth IRA—especially if you're younger and have yet to reach your peak earning years.

Conversely, if you think you'll be in a lower tax bracket when you retire, a traditional IRA can be an attractive choice; you get the tax benefits when you're in a relatively high tax bracket and can make your withdrawals when you're potentially in a lower bracket.

If you think your tax bracket will be the same when you retire, it's almost a wash for income tax purposes. 

Despite not offering an upfront tax deduction, a Roth IRA can offer flexibility to manage your taxes and spending in retirement because you can withdraw money without increasing your tax bill—which could come in handy if, for example, you have a large, one-time expense after you've retired. 

Roth IRAs let you withdraw contributions anytime for any reason without tax or penalty—but just because you can doesn't mean you should, particularly if you're fairly young. Taking money out of your Roth IRA means you may miss out on the potential for compounding gains for retirement. And when you can put in only $6,500 ($7,500 if you're age 50 or older) yearly, it might be difficult to make up the amount you withdrew.

Finally, should your tax rate increase in the future or when you retire, contributing to a Roth IRA after paying taxes can add tax diversification to your retirement savings.

If you change jobs, you have the opportunity to convert a traditional 401(k) directly into a Roth IRA without having to roll it into a traditional IRA first. Just remember, you must pay federal income tax on the full amount at the time of the rollover. Also, you may have other choices, including keeping your assets in your former employer's plan, rolling over assets to your new employer's plan, rolling over assets to a new traditional IRA, or taking a cash distribution (on which taxes and possible withdrawal penalties may apply).

An increasing number of employers offer Roth 401(k)s in addition to traditional 401(k)s. With a Roth 401(k), you can contribute a portion or all of your paycheck up to certain limits. You can also choose to have some of your paycheck go pre-tax into a traditional 401(k) and some post-tax into a Roth 401(k).

Unlike a Roth IRA, contributions to a Roth 401(k) are not subject to earnings limits. This means if you aren't eligible to contribute to a Roth IRA because your income is too high, you may be able to contribute to a Roth 401(k). Also, just like a regular 401(k), you can contribute more to a Roth 401(k) (up to $22,500 with a $7,500 catch-up contribution) than you can to a Roth IRA.

Distributions from a Roth 401(k) are subject to the same general tax rules as a Roth IRA, with the exception of RMDs. For tax years up to 2023, Roth 401(k)s had to take RMDs. However, for tax years 2024 onward, RMDs are no longer necessary thanks to SECURE Act 2.0.

If you're ineligible for a Roth IRA because of income limits, some investors choose to make contributions to a traditional IRA and then later convert those contributions to a Roth IRA.

High earners who aren't eligible to make Roth IRA contributions could make nondeductible contributions to a traditional IRA and then convert to a Roth (sometimes called a "backdoor Roth conversion"). However, there are some caveats.

You can't pick and choose which portion of traditional IRA money is converted. The IRS looks at all earnings from traditional IRAs as one when it comes to distributions, including funds from Roth conversions. Traditional IRA balances are aggregated so that the amount converted consists of a prorated portion of taxable and nontaxable money.

So, making nondeductible contributions to a traditional IRA with the goal of later converting to a Roth IRA would likely work best if you have little or no existing deductible IRA balance to muddy the waters. Still, any earnings leading up to conversion would be subject to income tax. We generally suggest that the tax be paid with other funds, not withdrawals from the IRA, to maximize the amount available to convert and contribute to the Roth account.

Both traditional and Roth IRAs are great long-term savings tools, so educate yourself on the differences and make an informed decision that fits your retirement goals. If you expect tax rates in the future will rise, either because your wealth and income will be higher when you retire or a change in tax law, consider Roth accounts. Also, be sure to talk with your CPA or tax professional about whether a traditional or a Roth IRA—or both—makes sense for you.