Roth vs. Traditional IRA: Everything You Need to Know

Adulting includes planning for retirement and should be essential regardless of your age. In your 20s, and think you’re too young? Nope, you’re in the ideal age range because the younger you are, the more time your money will grow due to the magic of compound interest. You could even retire earlier than usual, depending on when you start, but the key action is to begin if you haven’t started. 

IRAs (Individual Retirement Accounts) are one of the best tools for building future wealth, and knowing the difference between a Roth and a Traditional can really affect your money. Both are tax-advantaged, but let’s go over the rules so you can pick the right one for yourself!

1. Traditional IRA = Tax Break Now

With a Traditional IRA, you put in pre-tax dollars, meaning you could lower your taxable income right now, which can result in a smaller tax bill. Your investments grow tax-deferred, so you don’t pay any taxes until you withdraw money during retirement. 

You can’t start taking money OUT until you’re 59 ½, though. Any younger, and you’ll be hit with penalty fees, which you don’t want. But you can’t leave your money in there “forever” either, as the IRS will make you start doing RMDs (Required Minimum Distribution) at age 73. 

How much you can deduct depends on your income and if you have a retirement plan at work. So, if you have a 401(k), the tax break for contributing to a Traditional IRA shrinks once you earn above a certain amount. For 2025, if you’re filing single and make less than $79,000, you can deduct the full amount. If you make more, the deduction decreases and goes away at $89,000. 

The full deduction is allowed for married couples if their combined income is under $126,000 and goes away by $146,000. If you (or your spouse) don’t have a retirement plan at work, you can deduct the full amount no matter how much you make!

2. Roth IRA = Pay Now, Relax Later

Roth IRAs are the opposite. You contribute with after-tax dollars, so you don’t get that upfront tax break, BUT your money grows tax-free, and when you withdraw, it’s also tax-free. 

You can also take out your contributions at any time without penalties, and there are no RMDs to worry about. The only catch is that your income needs to be under $150,000 if filing single and $236,000 if filing jointly. 

Contributions can be taken out at any time without penalty because that’s your after-tax dollars. Still, it doesn’t include withdrawing any earnings, which are the interest, dividends, and capital gains, unless you meet specific requirements:

•  Age 59 ½
• The Roth IRA account is at least 5 years old 
• If withdrawing $10,000 maximum as part of a first-time home purchase

3. Roth vs. Traditional Fast Facts

Feature	Traditional IRA	Roth IRA
Tax Benefit	Tax break now	Tax-free money later
RMDs	At age 73	No, keep it as long as you want
Income Limits	No, but deductions may phase it out	Yes, check before you contribute
Early Access	Penalties before 59 ½	Take out what you put in at anytime

4. Which IRA Should You Go For?

Will your tax bracket be higher now or later? If you think you’ll make more later as you grow in your career, then a Roth will be a great option! 

But if you want a tax break today or expect your income to drop in retirement, then Traditional can be the way to go. You can also think about how much flexibility you want because Roth gives effortless access to contributions anytime if you need some money back.

5. 2025 Contribution Limits

IRAs are so fantastic for growing retirement money that there’s a limit on how much you can actually contribute each year. For 2025, you can put in up to $7,000; if you’re over age 50, you can put in up to $8,000.

You can contribute the full amount if you’re single and making under $150,000. If you make over $150K but under $165K, you can contribute a reduced amount, which can be calculated using the Fidelity IRA tool. Making 165K and over? Then, you can’t contribute at all to a Roth. 

Married filing jointly couples can each contribute up to $7,000 if their combined income is under $230,000. If your combined is over $230K but under $240K, it drops to a reduced amount, and you can use the same calculator to figure your number. Making over $240K together? Then, no contributions can be made. 

Avoid These Mistakes

You’ll want to make sure to avoid these mistakes when you have either a Traditional or Roth IRA.

1. Take the Contribution Limit Seriously

Don’t go over the contribution limit, or you’ll get a 6% penalty for the extra amount each year it stays in your account! Ouch. The limit can change each year, so pay close attention. We’ll also update this article when the IRS shares new numbers.

2. Opening a Roth IRA when you don’t qualify

Roth IRAs are popular for their tax-free withdrawals, but make sure your income doesn’t disqualify you from opening one. If you make over $165,000, you can’t open a Roth.

3. Forgetting about RMDs for Traditional IRAs

If you accidentally miss the RMD dates after age 73, the IRS hits you with a 25% penalty on the amount you should’ve drawn, ON TOP of any income taxes owed. Those who act quickly can potentially have it waived or have the penalty reduced to 10%, but that still hurts to pay the fees.

4. Withdrawing Roth EARNINGS too early

Reclaiming or taking back the contributions or money you’ve put into a Roth is OK and can be done anytime. But don’t confuse the money with earnings, like the dividends, interest, or capital gains earned.

Can You Have Both?

You actually don’t have to choose one or the other if you want both a Roth and a Traditional IRA. This can help with “tax diversification,” which allows you to draw from whichever account to help you keep more money without having to predict future tax laws.

The Money Move

Now that you understand what a Roth and Traditional IRA can offer, you can pick one or have both to give you more options when you retire. Start early and stay consistent! 

Most IRA platforms have financial consultants on standby to answer questions or provide guidance if you feel lost or need help getting started. Utilize their time to make sure everything on your end is set up correctly so you can get it automated to invest and chill.