Traditional IRA vs. Roth IRA: What’s the Difference? (2024)

The same $10,000 limit applies to those who are married but file separate returns, and qualifying widow(er)s are still subject to the same limits as married filers of joint returns. And you can still claim a full deduction with no income limits if you're single, head of household, or you're married and your spouse is not covered by a plan at work.

The 2023 limits are $218,000 for a full deduction and $228,000 for no deduction if you're married filing jointly with a spouse who is covered by a plan at work.

Income Requirements

Roth IRAs also have an income cap. You're limited on how much you can contribute to a Roth IRA if you exceed these limits, or you may not be able to contribute at all.

You can't contribute to a Roth if you earned a modified AGI (MAGI) of $144,000 or more as a single taxpayer in 2022. However, you can make partial contributions if you earned between $129,000 and $144,000. Married taxpayers who file jointly can't contribute to a Roth if they earned $214,000 or more, but they can make partial contributions if they earned between $204,000 to $214,000.

These limits are also adjusted for inflation and they increase in 2023. You can't contribute to a Roth if you earned a modified AGI of $153,000 or more and you're a single taxpayer, but you can make partial contributions if you earned between $138,000 and $153,000. Married taxpayers who file joint returns can't contribute to a Roth if they earn $228,000 or more, but they can make partial contributions if they earn between $218,000 to $228,000.

Distribution Rules

One of the biggest differences between a traditional IRA and a Roth IRA is that you're not required to withdraw funds from a Roth IRA at a certain age. You've already paid taxes on the funds, so the Internal Revenue Service (IRS) isn't waiting to collect. The government requires withdrawals from traditional IRAs because taxes are deferred until the time you take the money.

You must begin withdrawing funds from a traditional IRA when you reach age 70½or age 72, depending upon your date of birth. This single difference makes many people select a Roth over a traditional IRA.

Early Withdrawals

Withdrawals from a traditional IRA before age 59½ can trigger a 10% early withdrawal penalty, but there are exceptions for certain life events. These include permanent and total disability, qualified education expenses, and the qualified first-time purchase of a home.

There's also a 10% early withdrawal penalty for withdrawing earnings from a Roth IRA before age 59½, but contributions to a Roth IRA are post-tax so there are no restrictions or penalties for withdrawing your original contributions before a certain age. This feature provides flexibility. It can be helpful if unexpected financial situations arise.

Opening an IRA

Many of the same institutions where you handle other aspects of your financial life can help you set up an IRA. Some are brick-and-mortar businesses, like banks and credit unions. There are also online options and firms, such as Charles Schwab, Fidelity, or E-Trade.

Each broker will have different options for you to choose from and different investment types within their packages. Be sure that you know what asset types an IRA is composed of, such as stocks, bonds, or other types of funds. Be sure you're comfortable with the risks of investing in the IRA you choose.

Multiple Retirement Accounts

It's possible to have multiple IRAs in addition to having a work-sponsored retirement plan. Many people have what's known as a "rollover IRA." They use it to move their 401(k) balance into a different account when they leave a job. Important rules are in place for shifting funds in that sort of situation to avoid penalties.

Contribution Limits

There's a maximum amount you can contribute to all your IRAs. It's a collective limit whether you save to just one IRA or contribute to multiple accounts, and it applies to both traditional and Roth IRAs. The limit is $6,000 for 2022, increasing to $6,500 in 2023, but those age 50 or older can add an extra $1,000 as a catch-up contribution.

Converting a Traditional IRA to a Roth IRA

What if your situation changes mid-career? You might change your mind about the type of IRA you need.

You can convert a traditional IRA into a Roth IRA, assuming that you're okay with paying the taxes associated with the move. It might be a good idea if you know that your tax bracket will soon change, or it can be helpful if you decide you'd rather have the tax-free withdrawals of a Roth IRA later in retirement. Just be aware that a conversion will trigger a tax on any of the untaxed amounts in the traditional IRA.

Which IRA Is Right for You?

Deciding which IRA you should have depends on your earnings and your tax situation, both when you begin contributing and what you expect in retirement. It also depends on your financial circ*mstances when you expect to begin your withdrawals.

Retirement accounts are built around tax incentives. Traditional IRAs offer qualified participants tax breaks up front. Taxes are only incurred upon withdrawing the funds. Roth IRAs do the opposite because they're funded with post-tax dollars. There are no taxes on withdrawals in retirement.

Roth IRAs don't have early withdrawal penalties on original contributions if you want to begin taking your withdrawals early. You can make withdrawals on your contribution amounts if you leave the earnings untouched until age 59½.

The Bottom Line

The tax benefits and required minimum distributions are the keys to deciding which of the two retirement accounts is best for you. Work through your finances to see where you are now and where you think you'll be when you want to retire. That can help you decide which is best for you. And keep in mind that you can save to both.

A financial advisor can help you weigh the features and benefits of both types of accounts. They can also help you forecast a realistic financial future.

Frequently Asked Questions (FAQs)