What’s the Difference Between a Traditional IRA and a Roth IRA? 

Do one thing: If you are in the workforce, it’s time to weigh your options and pick a savings plan for retirement. The sooner you start, the more you can accumulate for the future.

Saving For Your Future

There are several ways to set aside money for your future. While retirement plans known as 401(k)s get a lot of attention, Individual Retirement Accounts (IRAs) are also worth exploring. 

In 2023, nearly 65 million U.S. adults owned IRAs, which included traditional IRAs, Roth IRAs, and a few lesser-known accounts primarily for self-employed individuals, according to the Tax Policy Center at the Urban Institute and Brookings Institution. During that time, the average IRA balance was about $195,000, IRS data shows.  

Interestingly, some 23% of taxpayers have traditional IRAs, while about 11% own Roth IRAs. And while it’s possible to have multiple types of IRAs, the average balance in traditional IRAs sat at $211,000 in 2023, while the average balance in a Roth IRA came in at about $52,000.

So what’s the difference between a traditional IRA and a Roth IRA?

Traditional IRAs

Traditional IRAs were created by Congress in the mid-1970s to offer those not covered by other retirement plans (or employer pensions) a tax-advantaged way to save. They also established the ability for a worker who left a job the ability to roll over funds from a 401(k) retirement plan into an IRA.

With a traditional IRA, there are no income limits for making contributions – but depending on how much you earn, your contribution may or may not be tax-deductible.  Whether you can take the deduction or not, the money you invest can grow tax-deferred. When you withdraw it in retirement, you’ll pay taxes at your current income rate. 

Roth IRAs

Established by the Taxpayer Relief Act of 1997, Roth IRAs work differently.   You contribute money on which you’ve already paid taxes, so there’s no tax deduction for putting money into the account.  But the money grows tax-free, and withdrawals are also tax-free.  That’s a big benefit down the road.  

Because you are allowed to put money in both traditional and Roth IRAs, many people split the difference according to the Investment Company Institute (ICI). In 2023, 60% of households that owned Roth IRAs also owned traditional IRAs, ICI data showed.  (Having both can be beneficial in retirement because it allows you to pull from taxable money in the years when your income is lower and Roth funds in years when you learn more.) 

 Contribution Limits

The limits on contributions for traditional and Roth IRAs are the same for next year.  For tax years 2024 and 2025, the maximum Roth IRA contribution is $7,000 for those younger than 50 and $8,000 for those aged 50 and older. In the tax year 2024, single filers earning less than $146,000 – and joint filers earning less than $230,000 – can make a full Roth IRA contribution. In 2025, single filers earning under $150,000- and joint filers earning less than $236,000- can make a full Roth contribution

What’s Right For You? 

Here’s one way to look at it: Traditional IRAs are beneficial for those who think their tax rate will be lower in the future than it is now.  Roth IRAs are the opposite, they are beneficial for those who believe their tax rate will be higher. That generally means that younger people who expect their incomes to rise down the road are better off with Roth contributions (as long as they can afford to pay the taxes now). It’s also important to know where you think taxes are going in general.  If you believe tax rates will fall, that points to making a traditional IRA contribution. If you believe they’ll rise, it points to a Roth.  

Understanding Tax Benefits

Daniel Masuda Lehrman, a certified financial planner and owner of Masuda Lehrman Wealth LLC, notes that Roths have other advantages as well. “I often point out to my clients that unlike traditional IRAs, Roth IRAs do NOT have a required minimum distribution (RMD) requirement, which allows greater flexibility for withdrawals in retirement,” he says.  On the other hand, Lehrman notes, “Traditional IRAs can offer an immediate income tax deduction, but all principal and earnings are subject to ordinary income taxes upon distribution in retirement.” 

Final Word on Selecting IRAs

The good news here is that selecting either a traditional IRA or a Roth IRA is a great start on your path to saving for retirement. Both accounts offer tax breaks for saving for the future, and they both also offer easy access to the types of investments to help the money grow that you are tucking away.

If you are confused by the rules and guidelines that come with each type of account, it’s a good idea to seek guidance from a professional – such as a certified financial planner – who can explain the ins-and-outs of both types of plans and offer insight into which one might work best for your individual needs.

With reporting by Casandra Andrews