Roth IRA vs. Traditional IRA

The two main types of IRAs differ mainly in how and when your money is taxed. A Roth can be better for some savers.

Dayana Yochim, Andrea CoombesNovember 30, 2020
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Roth vs. traditional: How to choose

The biggest difference between a Roth IRA and a traditional IRA is how and when you get a tax break. Contributions to traditional IRAs are tax-deductible, but withdrawals in retirement are taxable. Contributions to Roth IRAs are not tax-deductible, but the withdrawals in retirement are tax-free.

Thus most advice on the Roth IRA vs. traditional IRA topic begins with a question: Do you think your tax rate will be higher or lower in the future?

If you can answer that question definitively, you can theoretically choose the type of IRA that will give you the biggest tax savings: If you expect to be in a higher tax bracket in retirement, choose a Roth IRA and its delayed tax benefit. If you expect lower rates in retirement, choose a traditional IRA and its upfront tax advantage.

It's hard to anticipate what your tax rate will be in retirement, particularly if you're decades away from leaving the workforce. Fortunately, there are other ways to determine whether a Roth or traditional IRA is best for you.

First things first: Check your IRA eligibility

The IRS rules on IRA eligibility may make the Roth vs. traditional decision for you. Your income will determine:

  • If you're eligible to contribute to a Roth.

  • How much of your contribution to a traditional IRA you can deduct from this year’s taxes. Traditional IRA deductibility is restricted only if you or your spouse has access to a workplace savings plan like a 401(k).

Traditional IRA income limits for 2020 and 2021

These income limits apply only if you (or your spouse) has a retirement plan at work. The limits are based on modified adjusted gross income, which is your adjusted gross income with some deductions added back in. (See IRS Publication 590-A, Worksheet 1-1, for instructions on figuring MAGI for traditional IRAs.)

Filing status

2020 MAGI

2021 MAGI

Deduction

Single or head of household

$65,000 or less

$66,000 or less

Full deduction

More than $65,000 but less than $75,000

More than $66,000 but less than $76,000

Partial deduction

$75,000 or more

$76,000 or more

No deduction

Married filing jointly

$104,000 or less

$105,000 or less

Full deduction

More than $104,000 but less than $124,000

More than $105,000 but less than $125,000

Partial deduction

$124,000 or more

$125,000 or more

No deduction

Married filing jointly (spouse covered by retirement plan at work)

$196,000 or less

$198,000 or less

Full deduction

More than $196,000 but less than $206,000

More than $198,000 but less than $208,000

Partial deduction

$206,000 or more

$208,000 or more

No deduction

Married filing separately (you or spouse covered by retirement plan at work)

Less than $10,000

Less than $10,000

Partial deduction

$10,000 or more

$10,000 or more

No deduction

Roth IRA income limits for 2020 and 2021

These income limits are based on modified adjusted gross income, which is your adjusted gross income with some deductions added back in. (See IRS Publication 590-A, Worksheet 2-1, for instructions on figuring MAGI for Roth IRAs.)

Filing status

2020 MAGI

2021 MAGI

Maximum annual contribution

Single, head of household or married filing separately (if you didn't live with spouse during year)

Less than $124,000

Less than $125,000

$6,000 ($7,000 if 50 or older)

$124,000 up to $139,000

$125,000 up to $140,000

Contribution is reduced

$139,000 or more

$140,000 or more

No contribution allowed

Married filing jointly or qualifying widow(er)

Less than $196,000

Less than $198,000

$6,000 ($7,000 if 50 or older)

$196,000 up to $206,000

$198,000 up to $208,000

Contribution is reduced

$206,000 or more

$208,000 or more

No contribution allowed

Married filing separately (if you lived with spouse at any time during year)

Less than $10,000

Less than $10,000

Contribution is reduced

$10,000 or more

$10,000 or more

No contribution allowed

» Want a Roth but don’t qualify? Read how a backdoor Roth IRA might allow you to get one anyway.

Worth noting: You can contribute to a traditional and a Roth IRA during the same year, as long as the total amount does not exceed the maximum allowable contribution limit: $6,000 in 2020 and 2021 ($7,000 if age 50 or older).

Why the Roth IRA works for most savers

Here’s why it may be better to go with the Roth vs. traditional IRA for those who qualify.

1. Early withdrawal rules are much more flexible with a Roth. Although early withdrawals from retirement accounts are generally discouraged, if you do have to break the seal on the cookie jar, the Roth allows you to withdraw contributions — money you put into the account; not earnings — at any time without having to pay income taxes or an early withdrawal penalty.

Dip into a traditional IRA before retirement and the IRS isn’t as lenient: You’ll likely be socked with a hefty 10% early withdrawal penalty and owe taxes at your current income tax rate on the money you take out. There are a few exceptions to this rule — see our page on traditional IRA withdrawal rules for details — but you’ll need to proceed much more carefully than you would with a Roth.

2. The Roth has fewer restrictions for retirees. Traditional IRAs require you to start taking required minimum distributions (RMDs) at age 72.

Unless you’re inheriting the Roth IRA, it has no required minimum distribution rules: You’re free to let your savings stay put in the account to continue to grow tax-free as long as you live.

3. Unless you’re an extremely disciplined saver, you’ll end up with more after-tax money in a Roth IRA. Yes, both types of IRAs offer a tax break. But there’s an oft-overlooked benefit to the way the Roth treats taxes: Because your tax break doesn’t arrive till retirement (via tax-free withdrawals), you won’t be tempted to spend it before then. With a traditional IRA, the tax benefit is delivered annually when you file your taxes, which makes it easy to fritter the money away on any number of things.

To come out even in terms of after-tax savings, you have to be disciplined enough to invest the traditional IRA tax savings you get every year back into your retirement savings. If that seems unlikely to happen, then you’d be better off saving in a Roth, where you’ll arrive at retirement with more after-tax savings.

4. Funding a Roth in conjunction with your 401(k) provides tax diversification. The classic 401(k) plan offered by most employers provides the same tax benefits as a traditional IRA. Although some workplaces offer a Roth 401(k) option for employees, if yours doesn’t, diverting some of those retirement savings dollars into a Roth IRA will give you more options for managing your tax burden in retirement.

Making the call

The sole advantage of a traditional IRA for most people is the upfront tax break. And we’re not dismissing this benefit: It can be a huge advantage for high earners and a great incentive for people who might otherwise skip saving for retirement. In the short term, it effectively makes it “cheaper” to save for retirement, since the tax savings each year reduces the cost of your contributions.

But you will eventually have to face that tax burden in retirement, which means unless you really need that upfront tax break, it’s hard to go wrong with a Roth IRA. Still, don’t take our word for it: Browse the key differences between the accounts below and make your own call.

ROTH IRA

TRADITIONAL IRA

Contribution limit

$6,000 in 2020 and 2021 ($7,000 if age 50 or older)

$6,000 in 2020 and 2021 ($7,000 if age 50 or older)

Key pros

  • Qualified withdrawals in retirement are tax-free.

  • Contributions can be withdrawn at any time.

  • If deductible, contributions reduce taxable income in the year they are made.

Key cons

  • No immediate tax benefit for contributing.

  • Ability to contribute is phased out at higher incomes.

  • Deductions may be phased out.

  • Distributions in retirement are taxed as ordinary income.

Early withdrawal rules

  • Contributions can be withdrawn at any time, tax- and penalty-free.

  • Unless you meet an exception, early withdrawals of earnings may be subject to a 10% penalty and income taxes.

  • Unless you meet an exception, early withdrawals of contributions and earnings are taxed and subject to a 10% penalty.

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