coffee mug near open folder with tax withholding paper by Kelly Sikkema courtesy of Unsplash.

Roth Vs. Traditional IRA

Bill Rautiola |
Categories
Invest

Roth Vs. Traditional IRA

As an investor, should you be contributing to a Roth IRA or a Traditional IRA? The correct choice depends on your eligibility, expected tax rate, and personal goals. 

First let’s explore the features of the two account types:

Roth IRA 

Contributions

  • Funded with after-tax dollars (no upfront tax deduction).
  • Annual contribution limit (2025): $7,000 (under age 50) or $8,000 (age 50+ with catch-up).
  • Contributions can be made up to the tax filing deadline (usually April 15 of the following year).
  • Income limits apply - eligibility to contribute phases out at higher income levels.
  • Tax-free growth: Investments inside the account grow tax-free.

Withdrawals

  • Qualified withdrawals are tax-free if:
    • Account has been open at least 5 years, and
    • You are 59½ or older (or meet an exception like disability or first-time home purchase up to $10,000).
  • Contributions (your original deposits) can be withdrawn anytime, tax- and penalty-free.
  • Earnings withdrawn before age 59½ and before 5 years may be subject to taxes and a 10% penalty (with some exceptions).

Required Minimum Distributions (RMDs)

  • Unlike Traditional IRAs, no RMDs during the account owner’s lifetime.
  • Heirs who inherit a Roth IRA generally must withdraw funds within 10 years, but withdrawals remain tax-free.

Traditional IRA

Contributions

  • Funded with pre-tax dollars if deductible, or with after-tax dollars if income limits apply.
  • Annual contribution limit (2025): $7,000 (under age 50) or $8,000 (age 50+ with catch-up).
  • Contributions can be made up to the tax filing deadline (usually April 15 of the following year).
  • Deductibility phases out at higher income levels if you or your spouse are covered by a workplace retirement plan.

Growth & Earnings

  • Tax-deferred growth: Investments inside the account grow tax-deferred.
  • No taxes on dividends, interest, or capital gains while funds remain in the account.

Withdrawals

  • Withdrawals are taxed as ordinary income.
  • Penalty-free withdrawals allowed starting at age 59½.
  • Early withdrawals before 59½ may face a 10% penalty plus income taxes (with some exceptions like first-time home purchase, qualified education expenses, or certain medical costs).

Required Minimum Distributions (RMDs)

  • RMDs must begin at age 73 (for those born 1951–1959) or age 75 (for those born 1960 or later).
  • RMDs are taxable as ordinary income.

What Account is Better?

While there are many factors to consider, amidst an everchanging tax code in the U.S., the correct account type for you depends upon your personal situation. Below are some generalizations.

Roth IRA may be better if:

  • You expect to be in a higher tax bracket in retirement than you are now.
  • You want tax-free income in retirement.
  • You want the flexibility to withdraw contributions anytime without taxes or penalties.
  • You want to avoid RMDs (since Roth IRAs don’t require them during your lifetime).
  • You’re younger, with many years for investments to compound tax-free.

Traditional IRA may be better if:

  • You expect to be in a lower tax bracket in retirement than you are now.
  • You want an upfront tax deduction today to reduce your taxable income.
  • You earn too much to contribute directly to a Roth IRA (though Roth conversions are still an option).
  • You want to defer taxes as long as possible, paying them only when you take withdrawals.

Situational Considerations

  • High earners who can’t contribute directly to a Roth may use a Traditional IRA + Roth conversion (“backdoor Roth”) strategy.
  • Near-retirees who need a tax deduction today often lean toward a Traditional IRA.
  • Younger savers with lower incomes typically benefit more from a Roth IRA.
  • Many clients choose to split between both (when eligible), creating tax flexibility in retirement.

It is always advised to discuss your retirement contributions with a financial advisor and/or CPA.

-Bill Rautiola RICP ®, AIF ®, PPC ®

 

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.