Planning for retirement might feel far off, but the earlier you start saving, the more time your money has to grow. One of the easiest ways to begin is by opening an Individual Retirement Account, or IRA. These tax-advantaged accounts are designed to help you save for the future—but not all IRAs work the same way. The two most common types are the Traditional IRA and the Roth IRA. Understanding how they differ can help you choose the option that best fits your financial goals and tax situation.
Here’s a clear, beginner-friendly breakdown of what sets these retirement accounts apart.
What Is an IRA?
An IRA (Individual Retirement Account) is a type of investment account that lets you save for retirement while offering tax benefits. You can open an IRA through a bank, credit union, or brokerage, and you can invest your contributions in things like mutual funds, stocks, or bonds.
Both Roth and Traditional IRAs come with annual contribution limits set by the IRS. For 2024, the limit was $6,500 (or $7,500 if you’re age 50 or older). But the key difference between the two types of IRAs lies in how and when you get taxed.
Traditional IRA: Tax Break Now, Taxes Later
A Traditional IRA offers a tax deduction when you contribute, which can lower your taxable income for the year. Your investments grow tax-deferred, meaning you don’t pay taxes on any gains until you withdraw the money in retirement.
Key features of a Traditional IRA:
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Contributions may be tax-deductible: If you meet certain income and coverage limits, you can deduct the amount you contribute from your taxable income.
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Taxes are paid later: When you take money out in retirement, your withdrawals are taxed as ordinary income.
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Required minimum distributions (RMDs): Once you turn age 73, you’re required to start taking a minimum amount from your account each year, whether you need the money or not.
Best for: People who expect to be in a lower tax bracket in retirement, or those who want an immediate tax break.
Roth IRA: Pay Taxes Now, Withdraw Tax-Free Later
A Roth IRA works in the opposite way: you contribute money you’ve already paid taxes on, but your investments grow tax-free—and you won’t owe any taxes when you withdraw the money in retirement.
Key features of a Roth IRA:
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Contributions are not tax-deductible: You won’t get a break on your income taxes now, but you also won’t owe taxes later.
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Tax-free withdrawals: As long as you’re 59½ or older and have had the account for at least five years, all withdrawals—including earnings—are tax-free.
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No required minimum distributions: Unlike Traditional IRAs, Roth IRAs don’t force you to start withdrawing money at a certain age.
Best for: People who expect to be in a higher tax bracket in retirement, or younger savers who want to maximize tax-free growth over time.
Comparing Roth vs. Traditional IRAs
Here’s a quick side-by-side to help visualize the differences:
| Feature | Traditional IRA | Roth IRA |
|---|---|---|
| Contributions | May be tax-deductible | Made with after-tax dollars |
| Tax on withdrawals | Taxable in retirement | Tax-free in retirement |
| Income limits to contribute | None (but deduction may be limited) | Yes—reduced at higher incomes |
| Required minimum withdrawals | Yes, starting at age 73 | No RMDs during your lifetime |
| Best for | Lower tax bracket in retirement | Higher tax bracket in retirement |
How to Decide Which IRA Is Right for You
Choosing between a Roth and Traditional IRA comes down to your current income, your future tax expectations, and your financial goals.
Consider a Traditional IRA if:
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You want to reduce your taxable income now
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You expect to be in a lower tax bracket when you retire
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You don’t qualify to contribute to a Roth due to income limits
Consider a Roth IRA if:
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You’re in a lower tax bracket now and want to lock in that rate
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You want tax-free income in retirement
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You like the flexibility of no required minimum distributions
You can also contribute to both types of IRAs in the same year (as long as your total contributions don’t exceed the annual limit). This strategy, known as “tax diversification,” can give you more options for managing taxes in retirement.
A Strong Start for Your Retirement Future
Understanding the difference between a Roth and Traditional IRA is a big step toward building a solid financial foundation. Whichever option you choose, the most important thing is to start saving early and consistently. The power of compounding can turn even small, regular contributions into a meaningful nest egg over time. By picking the IRA that fits your needs today, you’re setting yourself up for a more secure and flexible future tomorrow.