One of the most common ways people invest and save for retirement today is through a vehicle known as an individual retirement account (IRA). It offers similar benefits as a 401(k), but without having to go through an employer.

The two most common types of IRAs are Traditional and Roth, and while they share some advantages (like offering tax-deferred growth of capital over the years that you contribute and invest), they each have their own unique characteristics, especially when it comes to how they’re taxed.

Let’s take a closer look at how both Traditional and Roth IRAs work and their key benefits.

What Is a Traditional IRA and How Does it Work?

A Traditional IRA is a type of retirement savings account where contributions are made on a pre-tax basis. When you contribute to your account, you get to deduct your contributions, which both lowers your taxable income and could help you move to a lower tax bracket. 

For example, let’s say you had an income of $100,000 of income in 2025, which puts you in the 22% tax bracket. If you contribute $15,000 to your Traditional IRA, you bring your taxable income down to $85,000, which saves you $3,300 in income taxes. 

You invest your contributions in the IRA, and all of your investment growth will be tax-free. Then, when you take distributions from the account in retirement, the amount of the distributions is considered taxable income.

Once you contribute to your Traditional IRA, you have to keep the money in the account until you reach age 59 ½, except in select situations. Any early withdrawals are subject to a 10% early withdrawal penalty.

Traditional IRAs are subject to required minimum distributions (RMDs) starting at age 73. You must withdraw a certain amount each year to avoid a financial penalty. Your RMD is based on your age and the balance of your IRA.

Traditional IRA: Pros and Cons

What is a Roth IRA and How Does it Work?

Roth IRAs basically work the opposite way when it comes to their contributions and distributions. When you contribute to a Roth IRA, it’s with after-tax dollars, meaning you will not receive any tax deduction. 

A Roth IRA provides the same tax-free growth as a Traditional IRA during your saving and investing years, and provides tax-free distributions in retirement. While there is no immediate tax benefit in the year you make contributions, you could end up saving money in the long run.

There are income limits to be able to make contributions to a Roth IRA, meaning not everyone will qualify.

Roth IRAs have a unique feature from Traditional IRAs in that you can access your contributions at any time with no taxes or penalties. However, you can’t access your earnings until at least five years after your first contribution, even if you’ve met age 59 ½. Like Traditional IRAs, Roth IRA earnings withdrawn before age 59 ½ are subject to a 10% early withdrawal penalty, with a few exceptions.

Roth IRA: Pros and Cons

The Key Differences Between Roth and Traditional IRAs

Traditional and Roth IRAs have some similarities as it relates to their contribution limits, as well as the tax benefits while your money is in the account. But they have very different rules for taxes on contributions and withdrawals, when you can access your money, and more.

How to Check Your IRA Eligibility

Both Traditional and Roth IRAs have some specific eligibility requirements.

Earned income

First, both types of IRAs require that you have earned income to contribute, and the maximum amount you contribute is limited to 100% of your earned income. So, while the IRA contribution limit is $7,000 in 2025, if you only have $5,000 of earned income for the year, then you can’t contribute more than $5,000.

While this isn’t an issue for most people, it could be relevant if you’re contributing to a Roth IRA for your child. You can only contribute as much as your child earned during the year.

Income limits

Both types of IRAs also have income limits. Traditional IRA income limits prevent you from deducting your contributions if your income exceeds a certain amount, while Roth IRA income limits prevent you from contributing altogether if your income is too high.

In 2025, you can’t deduct your Traditional IRA contributions if you have access to a workplace retirement plan and earn more than $91,000 if you’re a single filer or $149,000 if you’re married. For Roth IRAs, you’re prohibited from contributing if you earn more than $168,000 as a single filer or $252,000 if you’re married.

Roth IRA vs. Traditional IRA: Which One Should You Choose?

The big question is, of course, which type of IRA to use for your retirement income planning? 

First, if you or your spouse participates in an employer-sponsored plan, check your level of modified adjusted gross income (MAGI) to see if you will be able to deduct your contribution for a tax break. If your income is too high for a deduction, then it makes sense to contribute to a Roth, as long as your income is below the eligibility for making Roth contributions.

If you’re not participating in an employer plan, then the decision becomes a little more difficult. 

The tax deduction benefit of a Traditional IRA contribution feels good in the moment, but remember, there will be tax due when you take distributions in retirement. Most people are in a lower tax bracket in retirement, so this trade-off may make sense, but no one really knows where tax rates will be 10 or 20 years down the road.

A good rule of thumb is that if you have a higher income today and want the immediate tax break, choose the Traditional IRA. If you expect to have a higher income during retirement and want to save the tax benefit until then, choose a Roth IRA.

If your income is above the limit to make a Roth contribution, then consider what’s known as a backdoor Roth IRA. To use this strategy, you would contribute money to your Traditional IRA, but then immediately do a Roth IRA conversion. There’s no income limit on Roth conversions the way there is for Roth contributions, so you can take advantage of the Roth IRA benefits even with a high income.

Can You Have Both a Roth IRA and a Traditional IRA?

If you’re having trouble choosing between a Traditional and Roth IRA, we have good news: you don’t have to choose. You can have both types of IRAs and split up your contributions between the two accounts. This would allow you to enjoy some of each tax benefit.

Just know that even if you open two different accounts, your total IRA contributions are still capped at $7,000 (as of 2025). You could contribute $3,500 to each account, $7,000 to one and $0 to the other, or anything in between, you just can’t go over that limit.

Work With a Financial Advisor to Choose the Right IRA

The good news is that with two types of IRAs available, it’s likely that there’s a solution that works for your retirement planning goals. 

Both Traditional and Roth IRAs are powerful tools to help you prepare for retirement. Work with your financial advisor and a tax specialist to determine if making pre-tax contributions or Roth contributions makes sense for your situation.

To learn more, set up a free consultation with a Wealth Enhancement Group advisor and find out which IRA makes the most sense for you.

Frequently Asked Questions Regarding IRAs

What is the main difference between a Traditional IRA and a Roth IRA?

A Traditional IRA generally gives you a tax deduction today, with taxable withdrawals in retirement. A Roth IRA gives you no tax deduction today, but qualified withdrawals in retirement are tax free. Both offer tax advantaged growth while your money stays in the account.

How much can I contribute to an IRA in 2025?

According to the article, you can contribute up to $7,000 to IRAs in 2025, or $8,000 if you are age 50 or older. This limit applies to the total of all your Traditional and Roth IRA contributions combined.

When do I pay taxes with a Traditional IRA vs a Roth IRA?

With a Traditional IRA, the tax break typically comes up front as a deduction, and you pay income tax later when you take withdrawals in retirement. With a Roth IRA, you pay tax now on your contributions, and qualified withdrawals in retirement are tax free.

Are there income limits for Traditional and Roth IRAs?

Yes. For Traditional IRAs, higher income can limit your ability to deduct contributions if you or your spouse participate in a workplace retirement plan. For Roth IRAs, higher income can limit or prevent you from making direct contributions at all. The article highlights that these income rules can affect which IRA type makes more sense in a given situation.

What are required minimum distributions (RMDs) and which IRA has them?

Traditional IRAs require you to start taking required minimum distributions beginning at age 73. These withdrawals are taxable as income. Roth IRAs, by contrast, do not require RMDs during the original account owner’s lifetime.

Can I take money out of my IRA before retirement?

Yes, but the rules differ. With a Traditional IRA, early withdrawals (before age 59½) are generally taxable and may be subject to a 10 percent penalty. With a Roth IRA, you can withdraw your contributions at any time tax and penalty free, but early withdrawals of earnings may be taxed and penalized.

Can I have both a Traditional IRA and a Roth IRA at the same time?

Yes. You can hold both types of IRAs and split your contributions between them. The key is that your total contributions to all IRAs cannot exceed the annual IRA limit for that year.

When does choosing a Roth IRA often make sense?

The article suggests that a Roth IRA can make sense if you are not able to deduct Traditional IRA contributions because of income limits and workplace plan coverage, or if you expect to be in a higher tax bracket in retirement and prefer tax free income later.

What is a backdoor Roth IRA?

A backdoor Roth IRA is a strategy where you contribute to a Traditional IRA and then convert that contribution to a Roth IRA. This can offer a way to gain Roth IRA benefits even when your income is above the limit for direct Roth contributions, although tax treatment can be complex.

How can a financial advisor help with IRA decisions?

An advisor can help you compare Traditional vs Roth IRA options in the context of your overall retirement plan, tax situation, and goals. They can also help you understand contribution limits, income limits, RMDs, and strategies such as backdoor Roth conversions.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

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