Roth vs. Traditional IRA: Which Is Best for You?

Investing, IRA, Retirement Planning, Roth IRA

Roth vs. Traditional IRA: Which Is Best for You?

When you retire and start drawing money from your investment accounts to live off of, do you anticipate that your tax rate will be higher than it is right now? If the answer is yes, choose a Roth IRA.

If you expect to be in a lower tax bracket in the future, then a traditional IRA is a better choice.

Have no idea how your future tax rate will compare to your current one? Consider splitting the difference: Contribute to both a traditional IRA and a Roth IRA in the same year (which the IRS allows as long as the total amount you sock away is within allowable limits).

Is it really that simple?

That was the dramatically abridged answer to the Roth-versus-traditional-IRA question. But don’t be fooled: Those pithy answers are based on reams of analysis of detailed IRS doctrine. And as long as we’re on a roll, let’s address two final obstacles that keep savers on the sidelines instead of jumping in and reaping the major benefits of setting up an IRA:

1. Eligibility issues in a nutshell: To see how much you’re eligible to save in a Roth IRA (it’s based on income parameters) or, if your choice is a regular IRA, how much of your contribution you’re allowed to deduct from this year’s taxes, see this Roth and traditional IRA contribution and deduction table.

2. The trick to picking the best place to open an IRA: Choice can be overwhelming. Let’s quickly narrow the vast field of contenders this way: If you’re the DIY type and prefer to manage the investments in your IRA on your own, focus on discount brokerage firms. See which of the major players were deemed top IRA providers for 2017 based on our research.

More comfortable with an automated service that determines the investment mix and adjustment schedule for you based on your financial goals and tolerance for risk? A robo-advisor is perfect retirement account management partner. We raked their services over the coals to compile our best robo-advisors round up to serve as your guide.

4 key differences between Roth and traditional IRAs

What Roth and regular IRAs have in common is that they offer a powerful tax-advantaged way to save for retirement. But how they do that — and other terms of the accounts — are very different, too:


The biggest difference between a Roth and a traditional IRA is how and when you get a tax break:

  • The tax advantage of a traditional IRA is that your contributions are tax deductible.
  • The tax advantage of a Roth IRA is that your withdrawals in retirement are not taxed.

In other words, with a traditional IRA, you pay taxes when you take distributions in retirement (or if you make withdrawals prior to retirement). A Roth IRA operates in reverse: You pay taxes upfront, because your contributions are not deductible. Earnings on your investments grow tax-free in a Roth and tax-deferred in a traditional IRA.

This table illustrates these accounts in action.

 If your tax rate is LOWER in retirementIf your tax rate is HIGHER in retirement
Current tax rate
Tax rate in retirement
Annual investment$5,500$5,500$5,500$5,500
After-tax value in retirement*$555,902$572,898$555,902$472,835
*Assumes a 7% annual return and 30-year time horizon; traditional IRA includes invested tax savings.

contribution limits

Both traditional and Roth IRAs come with eligibility rules and restrictions that determine how much you can contribute. Assuming you’re eligible for both, 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 of $5,500, or $6,500 if you’re age 50 and over.

The amount you’re allowed to contribute to a Roth IRA, however, isn’t an all-or-nothing scenario — it’s a “heck, yeah!” “sorta” and “sorry, not this year, cowboy” scenario. Roth contribution limits are based on household income, and those at higher incomes often find themselves squeezed out of Roth eligibility either partially or completely. (See our Roth IRA contribution limits page for details on how much your income will allow you to contribute.)

There are no income restrictions for contributing to a traditional IRAs — titans of industry and everyday workers alike are eligible to open and contribute up to the annual limit — but your income can affect how much of your IRA contribution you’re allowed to deduct from your taxes.

In addition to the size of your paycheck, traditional IRA deductibility takes into account tax filing status and whether you and/or your spouse are covered by an employer’s retirement plan. For details on how this is calculated, see our page on traditional IRA contribution limits.

Early withdrawals

It’s generally not a good idea to withdraw money from an IRA early, and the rules do a good job of deterring it: You must be at least age 59½ to avoid early withdrawal penalties and taxes. But sometimes dipping into your retirement savings is unavoidable.

When you take money out of a traditional IRA before retirement, the IRS socks you with a hefty 10% early-withdrawal penalty and taxes the money you take out as income at your current tax rate. (See our page on traditional IRA distribution rules for more details, as there are some exceptions to this rule.)

The Roth has better terms for those who break the seal on the retirement savings cookie jar: It allows you to withdraw contributions — money you put into the account — at any time without having to pay income taxes or an early withdrawal penalty. However, there are different rules when it comes to accessing the earnings from your Roth IRA: That money is subject to the five-year rule that states that any earnings withdrawn before your first Roth IRA contribution is at least 5 years old may be subject to income taxes and a 10% early withdrawal penalty.

See our detailed explanation of Roth IRA withdrawal rules for more details and the exceptions that apply to Roth accounts.

Required minimum distributions

Let’s fast-forward to your 70th birthday. Six months after you blow out the birthday candles you’ll be subject to required minimum distributions (RMDs) from your traditional IRA. Remember, the IRS is still waiting to tax that money it has left alone for so long.

Taking RMDs is not a big deal if you’re retired at age 70½ and are already living off your retirement savings. But if you’re a financially flush member of the silver-haired set who doesn’t necessarily need to withdraw funds from the IRA, the requirement is less appealing. Not only will you have to interrupt the growth of what’s in your account by making withdrawals, but if you’re still working and want to contribute more to a traditional IRA, you’re out of luck. No additional contributions are allowed after age 70½.

For those who live long and continue to prosper, the Roth is less stringent: It has no required minimum distribution rules (unless you inherit a Roth IRA — see our Roth RMDs post for details on that). You’re free to let your savings stay put in the account and continue to grow tax-free as long as you live. You’re also allowed to continue contributing to a Roth past the age of 70½. If you’re fortunate enough to not need to tap into the account for income right away and you want to pass on a larger account to your heirs, Roth is the way to go.

Your choices, once again

We’ve hit most of the high points of how Roth and traditional IRAs work and hope that you’re now able to confidently choose the best IRA for you. But if you’re still on the fence …


If you’re currently in a low tax bracket — anything in the low 20% range or below — a Roth IRA is probably a good choice. (See our breakdown on income tax brackets if you’re unsure where you stand today.) This is more likely the case if you’re in the early stages of your career, or you’ve changed careers and will be at a higher rung of the income ladder when you retire.

Why a Roth? Withdrawals from a Roth IRA in retirement are not subject to income tax. So when your future flush self starts drawing income from your Roth IRA savings, you won’t have to pony up income taxes to the IRS when your tax rate has gone up.


If you’re in a high tax bracket or close to retirement age, a traditional IRA makes the most sense. Why? A traditional IRA enables you to take a tax deduction when it benefits you most.

After their 40s or mid- to late 50s, people tend to migrate to a lower tax bracket due to full- or semi-retirement, taking on lower-paying but more meaningful work, or simply needing to draw less income if expenses have gone down. And since withdrawals from a traditional IRA are taxable as income as long as they’re taken after age 59½, by choosing a traditional IRA you save again on the backside because you’re taking out that money when you’re in a lower tax bracket.

If you’re ready to compare account providers for either type of account, see our analyses of the top traditional IRA providers and the top Roth IRA providers.

OK, what’s next?

If you’re now ready to open an IRA, browse the articles below for step-by-step guidance:

Man researching Roth IRA

How and Where to Open a Roth IRA

Woman researching traditional IRA

How and Where to Open a Traditional IRA

Dayana Yochim is a staff writer at NerdWallet, a personal finance website. Email: Twitter: @dayanayochim.

Updated June 27, 2017.