How do Roth IRAs differ from traditional retirement accounts?

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A Roth IRA and a Traditional IRA share the same basic mission, helping you save for retirement, but they take two very different paths to get there. Understanding the tax treatment, eligibility, and withdrawal rules of each can make a real difference in your long-term strategy.

Roth IRA vs. Traditional Retirement Accounts: Key Differences

Let’s start with taxes. With a Traditional IRA, contributions may be tax-deductible in the year they’re made. This can lower your current taxable income. However, the IRS taxes all retirement withdrawals as ordinary income. In contrast, you make Roth IRA contributions with after-tax dollars. There’s no deduction now, but qualified withdrawals, including earnings, are entirely tax-free. That’s the central difference in the conversation between the Roth IRA and the Traditional IRA. You’re choosing whether to pay taxes now or later.

The benefit Roth IRA accounts provide is evident if you think your tax rate will be higher in retirement. Pay now, skip taxes later. Traditional IRAs work better if you expect to be in a lower tax bracket later, allowing you to take a deduction when your income is higher and pay taxes at a lower rate during retirement.

Next is eligibility. For 2025, anyone with earned income, which includes wages, salaries, tips, and other taxable employee compensation, can contribute to a Traditional IRA, though the deductibility phases out at higher incomes if you or your spouse has a workplace retirement plan. Roth IRAs come with income caps: single filers making more than $165,000 and joint filers making more than $246,000 cannot contribute directly.

Both account types have the same contribution limits: $7,000 annually (or $8,000 if you’re 50 or older). But remember, you can’t contribute more than you earn.

Withdrawal rules are another key difference. With a Traditional IRA, withdrawals before age 59½ are taxed and usually penalized an extra 10%. You must also begin taking required minimum distributions (RMDs) at age 73. Roth IRAs don’t have RMDs during the account holder’s lifetime, which makes them attractive for estate planning or simply for those who prefer to let investments grow untouched.

As for taxes on Roth IRA accounts, the rules are more lenient. You can withdraw contributions at any time without taxes or penalties. Once you’re 59½ and the account has been open for at least five years, you can also withdraw tax-free. That flexibility can be beneficial. However, withdrawals of earnings can be subject to income tax and a 10% penalty if both the age requirement and 5-year holding period have not been met.

To recap:

• Traditional IRA: tax-deferred, deduct contributions now, pay later.
• Roth IRA: pay taxes now, take tax-free withdrawals later.
• Roths have income limits; Traditional IRAs don’t (but deductions may phase out).
• Roths have no RMDs; Traditional IRAs do.
• Roth contributions are accessible anytime, penalty- and tax-free.

The Roth IRA vs Traditional IRA debate isn’t one-size-fits-all. It comes down to your current income, expected future tax rate, and when you want (or need) access to your funds. If you value flexibility, tax-free withdrawals, and no RMDs, the benefits Roth IRA accounts offer could make them the better fit. If you would rather save taxes now and expect lower rates in the future, then a traditional IRA might make sense for you.

How BT can help

If you’re interested in learning more about Roth IRAs vs Traditional IRAs, contact Ben Bowers or call 770.396.7700.

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