Compare Traditional vs Roth IRA and calculate your retirement savings growth
An Individual Retirement Account (IRA) is one of the most powerful tools for building long-term wealth and securing your financial future. With tax advantages, compound growth potential, and flexible investment options, IRAs have helped millions of Americans achieve their retirement goals. This comprehensive guide will help you understand the different types of IRAs, contribution limits, tax benefits, and strategies to maximize your retirement savings.
The two most common types of IRAs are Traditional and Roth IRAs, each offering distinct tax advantages that can significantly impact your retirement planning strategy. Understanding these differences is crucial for making informed decisions about your financial future.
A Traditional IRA allows you to make tax-deductible contributions, reducing your taxable income in the year you contribute. Your investments grow tax-deferred, meaning you don't pay taxes on earnings until you withdraw the money in retirement. This approach is particularly beneficial if you expect to be in a lower tax bracket during retirement than you are currently.
Contributions to a Traditional IRA may be fully or partially deductible depending on your income, filing status, and whether you or your spouse are covered by a workplace retirement plan. The immediate tax deduction can provide significant savings, effectively reducing the after-tax cost of your contributions. For example, if you're in the 22% tax bracket and contribute $7,000, you could save $1,540 on your current year's taxes.
However, Traditional IRAs come with required minimum distributions (RMDs) starting at age 73, forcing you to withdraw a minimum amount each year and pay taxes on those distributions. This requirement can impact your tax planning in retirement and may push you into a higher tax bracket if you have other sources of retirement income.
A Roth IRA operates on the opposite principle: you contribute after-tax dollars (no immediate tax deduction), but all qualified withdrawals in retirement are completely tax-free. This includes both your contributions and all the investment growth accumulated over the years. The tax-free nature of Roth IRA withdrawals can be incredibly valuable, especially if tax rates increase in the future or if your retirement income is higher than expected.
Roth IRAs offer several unique advantages beyond tax-free withdrawals. There are no required minimum distributions during your lifetime, giving you complete control over when and how much to withdraw. This flexibility makes Roth IRAs excellent estate planning tools, as you can leave the account to grow throughout your retirement and pass it to heirs. Additionally, you can withdraw your contributions (but not earnings) at any time without penalty or taxes, providing a degree of liquidity that Traditional IRAs don't offer.
The trade-off is that Roth IRAs have income limits for direct contributions. High earners may be phased out of making direct Roth IRA contributions, though strategies like the "backdoor Roth IRA" can provide alternatives.
For 2025, the IRA contribution limits are set at $7,000 for individuals under age 50. If you're age 50 or older by the end of the tax year, you're eligible for catch-up contributions, allowing you to contribute an additional $1,000, bringing your total limit to $8,000. These limits apply to the combined total of all your Traditional and Roth IRA contributions, not to each account separately.
Catch-up contributions recognize that individuals approaching retirement need opportunities to accelerate their savings. If you started saving late or experienced career interruptions, these additional contributions can make a meaningful difference in your retirement readiness. Over a 15-year period from age 50 to 65, the extra $1,000 per year could grow to over $25,000, assuming a 7% average annual return.
It's important to note that contribution limits are set by the IRS and typically increase every few years to account for inflation. Planning your contributions strategically—such as contributing early in the year rather than at the deadline—can maximize your tax-advantaged growth. Contributing at the beginning of the year gives your money nearly 12 additional months to grow compared to waiting until the April tax deadline.
While anyone with earned income can contribute to a Traditional IRA, the deductibility of those contributions depends on several factors, including your income, tax filing status, and whether you or your spouse have access to a workplace retirement plan like a 401(k).
For 2025, if you're covered by a workplace retirement plan, the deduction for Traditional IRA contributions begins to phase out at certain income levels. For single filers, the phase-out range is $77,000 to $87,000 of modified adjusted gross income (MAGI). For married couples filing jointly where the spouse making the IRA contribution is covered by a workplace plan, the phase-out range is $123,000 to $143,000. If you're not covered by a workplace plan but your spouse is, the phase-out range is $230,000 to $240,000.
Roth IRA contributions also have income limits. For 2025, the ability to contribute to a Roth IRA phases out for single filers with MAGI between $146,000 and $161,000, and for married couples filing jointly with MAGI between $236,000 and $246,000. If your income exceeds these limits, you cannot make direct Roth IRA contributions, though the backdoor Roth IRA strategy may still be available.
Understanding these phase-out ranges is crucial for tax planning. If your income is near a phase-out threshold, strategic decisions about retirement plan contributions, tax deductions, or timing of income recognition could impact your IRA eligibility and deductibility.
The primary appeal of IRAs lies in their tax advantages, which can significantly enhance your wealth accumulation over time. Tax-deferred or tax-free growth means that all dividends, interest, and capital gains generated within your IRA compound without being reduced by annual taxes. This compounding effect becomes increasingly powerful over long time horizons.
Consider two investors who each contribute $7,000 annually for 30 years with a 7% average return. In a taxable account, assuming a 15% tax on dividends and capital gains, the account might grow to approximately $560,000. In an IRA with the same contributions and returns, the account could grow to over $700,000—a difference of $140,000 simply due to tax-advantaged compounding.
For Traditional IRAs, the immediate tax deduction provides upfront savings that can be reinvested, effectively increasing your contribution capacity. If you're in the 24% tax bracket and receive a $1,680 tax savings on a $7,000 contribution, you could invest that tax savings elsewhere or use it to further boost your emergency fund or pay down debt.
For Roth IRAs, the tax-free withdrawal benefit becomes increasingly valuable as your account grows. Withdrawing $700,000 tax-free in retirement provides significantly more spending power than withdrawing the same amount from a Traditional IRA and paying taxes at retirement rates that could be 15-25% or higher.
IRA withdrawal rules are designed to encourage long-term retirement savings by imposing penalties on early distributions. Generally, withdrawals from Traditional IRAs before age 59½ are subject to a 10% early withdrawal penalty in addition to ordinary income taxes. This penalty ensures that IRA funds are used for their intended purpose: retirement income.
However, the IRS provides several exceptions to the early withdrawal penalty, including distributions for first-time home purchases (up to $10,000 lifetime limit), qualified education expenses, unreimbursed medical expenses exceeding 7.5% of adjusted gross income, health insurance premiums during unemployment, and substantially equal periodic payments based on life expectancy. Understanding these exceptions can provide valuable flexibility if you need to access funds before retirement age.
Roth IRA withdrawal rules are more flexible. You can always withdraw your contributions tax-free and penalty-free since you already paid taxes on that money. However, to withdraw earnings tax-free and penalty-free, you must meet the "5-year rule" (the account must be at least 5 years old) and be age 59½ or older, or meet another qualifying exception such as first-time home purchase or disability.
Once you reach age 73, Traditional IRA owners must begin taking required minimum distributions (RMDs) each year. The RMD amount is calculated by dividing your account balance by a life expectancy factor provided by the IRS. Failing to take your RMD results in a steep penalty—25% of the amount you should have withdrawn (reduced to 10% if corrected timely). Roth IRAs, notably, do not have RMDs during the owner's lifetime, providing greater flexibility and estate planning advantages.
Required Minimum Distributions represent a critical consideration for Traditional IRA owners. Starting at age 73 (for individuals who reach age 72 after December 31, 2022), you must withdraw a minimum amount from your Traditional IRA each year. This requirement ensures that the government eventually collects taxes on the tax-deferred growth accumulated in your account.
The RMD amount increases each year as you age, because the IRS's life expectancy factors decrease, resulting in a larger required distribution. For example, at age 73, your distribution period might be 26.5 years, requiring you to withdraw about 3.8% of your account balance. By age 80, the distribution period decreases to about 20.2 years, increasing your required withdrawal to approximately 5% of your balance.
RMDs can significantly impact your tax situation in retirement. Large RMD amounts can push you into higher tax brackets, trigger increased Medicare premiums through Income-Related Monthly Adjustment Amounts (IRMAA), and cause more of your Social Security benefits to become taxable. Strategic planning before age 73—such as Roth conversions or partial IRA distributions—can help minimize RMD-related tax burdens.
The backdoor Roth IRA has become an increasingly popular strategy for high-income earners who exceed the income limits for direct Roth IRA contributions. This legal strategy involves making a non-deductible contribution to a Traditional IRA and then immediately converting it to a Roth IRA.
Since there are no income limits for converting Traditional IRA funds to Roth IRA funds, this two-step process effectively allows high earners to fund Roth IRAs regardless of income. The key is to convert the funds quickly after contributing to minimize any earnings that would be subject to taxes on the conversion. If executed properly, the only taxes owed are on any growth between the contribution and conversion—typically minimal if done within days.
The main complication with backdoor Roth conversions is the "pro-rata rule," which requires you to consider all your Traditional, SEP, and SIMPLE IRA balances when calculating the taxable portion of the conversion. If you have existing pre-tax IRA balances, a portion of your conversion will be taxable based on the ratio of pre-tax to after-tax funds across all your IRAs. Some individuals roll existing IRA balances into 401(k) plans (if their plan allows) to clear the way for clean backdoor Roth conversions.
Beyond the backdoor Roth IRA, traditional Roth conversions involve moving funds from a Traditional IRA to a Roth IRA, paying taxes on the converted amount in the year of conversion. While this creates an immediate tax liability, it can be advantageous in several scenarios.
Roth conversions are particularly attractive during years when your income is lower than usual—such as early retirement before Social Security begins, gap years between jobs, or years with significant deductions or losses. Converting funds during lower-income years allows you to "fill up" lower tax brackets at favorable rates, reducing the overall tax burden compared to taking distributions in higher-tax years.
Another strategic consideration is converting funds before RMD age. By converting Traditional IRA assets to Roth IRA assets, you reduce future RMDs, providing more control over your taxable income in retirement. This strategy can be especially valuable if you anticipate having substantial retirement income from other sources or if you want to minimize Medicare premium surcharges.
Multi-year Roth conversion strategies allow you to spread conversions across several years, managing your tax bracket carefully. Financial advisors often recommend converting just enough each year to stay within your current tax bracket, maximizing the amount converted while minimizing tax bracket creep.
To contribute to an IRA, you must have earned income from employment or self-employment. Earned income includes wages, salaries, tips, bonuses, commissions, and self-employment income. It does not include investment income, Social Security benefits, pension payments, or rental income (unless it's from real estate professional activities).
There is no age limit for contributing to IRAs as long as you have earned income. Previous rules that prohibited Traditional IRA contributions after age 70½ were eliminated in 2020, allowing individuals to continue contributing as long as they work. This change recognizes that many people work past traditional retirement age and should be able to continue benefiting from tax-advantaged retirement savings.
Spouses can also contribute to IRAs on behalf of non-working or low-earning partners through spousal IRAs. As long as one spouse has sufficient earned income to cover both contributions, each spouse can contribute up to the annual limit to their own IRA. This provision ensures that stay-at-home parents or caregivers can build retirement savings even without direct earned income.
Choosing between Traditional and Roth IRAs—or using both strategically—depends on multiple factors including your current tax rate, expected retirement tax rate, time horizon, income level, access to workplace retirement plans, and estate planning goals.
If you're early in your career with a relatively low income and expect earnings to increase significantly, Roth IRA contributions can be extremely valuable. You'll pay taxes at your current low rate and enjoy tax-free withdrawals when you're potentially in a higher tax bracket. Conversely, if you're in peak earning years with high current income, Traditional IRA deductions can provide immediate tax relief, with the expectation that you'll be in a lower bracket in retirement.
Many financial advisors recommend tax diversification—having both pre-tax (Traditional) and after-tax (Roth) retirement accounts. This strategy provides flexibility in retirement to manage your tax situation by choosing which accounts to draw from based on your tax circumstances each year. You might draw from Traditional accounts in low-income years and preserve Roth accounts for higher-income years or large expenses.
Regularly reviewing and adjusting your IRA strategy as your circumstances change is essential. Major life events like marriage, divorce, job changes, inheritance, or significant income changes should trigger a review of your retirement savings strategy to ensure it remains aligned with your goals and tax situation.
IRAs remain one of the most effective tools for building retirement wealth, offering powerful tax advantages that can add tens or hundreds of thousands of dollars to your retirement nest egg over time. Whether you choose a Traditional IRA for immediate tax deductions, a Roth IRA for tax-free retirement income, or a combination of both for tax diversification, the key is to start contributing consistently and take full advantage of these accounts' benefits.
Understanding contribution limits, income phase-outs, withdrawal rules, and strategic opportunities like backdoor Roth IRAs and Roth conversions empowers you to make informed decisions that optimize your tax situation both now and in retirement. Use this IRA calculator to model different scenarios, compare Traditional versus Roth strategies, and visualize how your retirement savings can grow over time with disciplined contributions and the power of compound growth.