Roth vs Traditional IRA: Which Is Better for You?

The Fundamental Difference

The choice between Roth and Traditional IRA comes down to when you pay taxes:

• Traditional IRA: Pay taxes LATER (in retirement)
• Roth IRA: Pay taxes NOW (contributions are after-tax)

2025 IRA Contribution Limits

| Age | Annual Limit |

|-----|--------------|

| Under 50 | $7,000 |

| 50 and older | $8,000 |

This limit is combined—you can't contribute $7,000 to each.

Traditional IRA

How It Works

1. Contribute pre-tax dollars (may be tax-deductible)
2. Money grows tax-deferred
3. Pay income tax on withdrawals in retirement

Tax Deduction Rules

No workplace retirement plan: Full deduction regardless of income

With workplace retirement plan (2024):

• Single: Phase out $77,000-$87,000
• Married filing jointly: Phase out $123,000-$143,000

Pros

• Immediate tax savings (if deductible)
• May result in lower lifetime taxes if retiring in lower bracket
• No income limits to contribute (but limits on deductibility)

Cons

• Taxes due on all withdrawals in retirement
• Required Minimum Distributions (RMDs) at 73 or 75
• Early withdrawal penalties before 59½

Roth IRA

How It Works

1. Contribute after-tax dollars (no tax deduction)
2. Money grows tax-free
3. Qualified withdrawals are 100% tax-free

Income Limits (2024)

Single filers:

• Full contribution: Under $146,000
• Partial contribution: $146,000-$161,000
• No direct contribution: Over $161,000

Married filing jointly:

• Full contribution: Under $230,000
• Partial contribution: $230,000-$240,000
• No direct contribution: Over $240,000

Pros

• Tax-free growth and withdrawals
• No RMDs (more control over withdrawals)
• Can withdraw contributions anytime without penalty
• Tax diversification for retirement

Cons

• No immediate tax deduction
• Income limits restrict eligibility
• Still subject to 5-year rule for earnings

Side-by-Side Comparison

| Feature | Traditional IRA | Roth IRA |

|---------|-----------------|----------|

| Tax on contributions | Deductible (maybe) | Not deductible |

| Tax on growth | Tax-deferred | Tax-free |

| Tax on withdrawals | Taxed as income | Tax-free |

| Income limits | For deduction | For contribution |

| RMDs required | Yes, at 73/75 | No |

| Early withdrawal | Penalty + taxes | Contributions only OK |

| Best if tax rate... | Higher now | Higher in retirement |

When to Choose Traditional IRA

Best Scenarios

• You're in a high tax bracket now and expect lower in retirement
• You need the current tax deduction
• You can deduct the contribution
• You're maxing out tax-advantaged space and want to defer more

Example

Current income: $150,000 (24% bracket)

Expected retirement income: $60,000 (12% bracket)

Traditional wins: Save 24% now, pay 12% later

When to Choose Roth IRA

Best Scenarios

• You're in a lower tax bracket now (early career)
• You expect higher taxes in retirement
• You want tax-free income flexibility in retirement
• You don't need the current tax deduction

Example

Current income: $50,000 (12% bracket)

Expected retirement income: $100,000+ (22%+ bracket)

Roth wins: Pay 12% now, avoid 22%+ later

The Case for Both

Having both traditional and Roth provides tax diversification—flexibility to manage taxes in retirement.

Benefits of Both

• Withdraw from traditional up to the top of low bracket
• Pull additional needs from Roth (tax-free)
• Manage income to optimize Social Security taxation
• Adapt to future tax law changes

What If Income Is Too High for Roth?

Backdoor Roth IRA

1. Contribute to non-deductible traditional IRA
2. Convert immediately to Roth IRA
3. Pay tax only on gains (minimal if done quickly)

Note: Pro-rata rule applies if you have existing traditional IRA balances.

Common Mistakes

1. Not Contributing Because You Can't Decide

Some retirement savings beats no retirement savings. Just pick one and start.

2. Ignoring Roth Because No Immediate Tax Benefit

Tax-free growth over decades is incredibly valuable.

3. Not Considering Backdoor Roth

If you're over the Roth income limits, the backdoor strategy often works.

4. Forgetting About 401(k) Roth

If your employer offers Roth 401(k), you can contribute regardless of income.

Decision Framework

Ask yourself:

1. Am I in a low tax bracket now? → Lean Roth
2. Do I expect higher income in retirement? → Lean Roth
3. Do I need the tax deduction now? → Lean Traditional
4. Am I over Roth income limits? → Consider backdoor Roth
5. Not sure? → Split between both

Key Takeaways

1. Traditional: Tax deduction now, taxed withdrawals later
2. Roth: No deduction now, tax-free withdrawals later
3. Choose based on current vs. expected future tax rates
4. Having both provides tax flexibility in retirement
5. High earners can use backdoor Roth strategy