Your Tax-Advantaged Retirement Plan: Traditional IRA Vs. Roth IRA

Monday, March 17, 2025

Will a Traditional IRA or Roth IRA Work Better for You?

Individual retirement accounts hold the largest pool of retirement assets in US brokerage accounts. Both of these types of IRAs encourage saving with generous tax advantages. You’ve arrived at the right place to learn more about the many benefits of individual retirement accounts. Just as necessary, you will understand how Roth and traditional IRAs differ and which one may help maximize your retirement.

More people currently rely on traditional IRAs, though Roth IRAs have grown more popular in recent years. Each plan offers tax breaks and a chance to maximize savings and income. Yet they have different rules and benefits. Your unique financial situation and retirement goals will determine if a traditional or Roth IRA provides the best outcome.

Facts About Roth and Traditional IRAs for Retirement Savings

According to the ICI, no other retirement investment type holds more American retirement assets than IRAs. [1] Other key facts about individual retirement accounts include:

US taxpayers own over $13 trillion in IRA assets. This amount makes up about one-third of the $38 trillion held in all types of retirement accounts, which includes employer-sponsored plans.
Traditional IRAs are the most common type, but Roth IRAs have rapidly increased in popularity.
IRA owners include households from all income groups and ages, though ownership generally increases with age and income. Older adults tend to focus more on retirement and also have employer-sponsored accounts to roll over to an IRA.
Savers have invested over 40% of their IRA assets in mutual funds, but you can include all sorts of assets including alternative assets and even real estate in self-directed accounts. Most IRA holders consider these accounts part of their overall retirement strategy, often developed with the assistance of financial advisors through strategic financial planning.

Traditional and Roth IRAs: What the Difference?

The IRS offers generous tax advantages for people who invest in either type of account. Some households even combine the two as part of their overall strategy to minimize taxes and improve income with the goal being to diversify separate silos of wealth accumulation with differing tax strategies. However, most folks will start with one IRA for an individual. Once you understand the differences between Roth and traditional IRAs, you can decide which choice or a combination of the two serves you best.

Your current taxable income, income tax rate, anticipated retirement income, and other financial considerations will determine which retirement plan can maximize your tax benefits and income. The following sections summarize key differences between Roth and traditional IRAs.

How Do Traditional IRAs Work?

A tax-deferred traditional IRA lets you make pretax contributions during your high earning years. You generally need to contribute earned income, though a working spouse can contribute if they file together as married. You can also rollover money from other accounts, like employer retirement plans. Since you can make tax-deductible contributions within IRA contribution limits, you can lower your taxable income for the current tax year when your earned income is at its highest.

Immediate tax savings give many people an incentive to begin traditional IRAs. However, you must pay taxes on your withdrawals during retirement. Taxable income will include both original contributions and earnings. You can enjoy tax-deferred earnings and income but not tax-free withdrawals. Expect the IRS to treat withdrawals as ordinary income.

Reasons to consider opening a traditional IRA include:

Do you believe you will drop to a lower tax bracket during retirement? If so, consider the benefits of delaying taxes and enjoying a lower tax rate in the future. Unlike a regular brokerage account or savings account, you also enjoy tax-deferred growth.
Would an extra deduction this tax year help you free funds to prepare for retirement? For example, you might use tax savings to increase retirement contributions and reduce debt. These steps can improve your financial security by reducing expenses and increasing income. The advantages of tax-deductible contributions plus tax-deferred growth may balance concerns about paying taxes in the future.

How Do Roth IRAs Work?

Roth IRAs don’t offer tax-deferred contributions to help increase the refund from your current tax return. Unlike traditional IRA contributions, you must deposit after-tax dollars to your account. However, you can enjoy tax-free withdrawals during retirement, including tax-free growth. If you start making contributions early enough, the tax-free growth can be substantial.

Should you consider a Roth IRA? You might not get instant tax breaks. However, you have a chance to enjoy a tax-free retirement asset. Qualified distributions will not increase your taxable income at all.

Are there other differences between Roth and traditional IRAs? Yes, these two types of IRAs handle withdrawals and required distributions differently. They also don’t have the same rules for income and contribution limits. The following sections compare these differences between Roth and traditional IRAs.

IRA Withdrawal Rules

You may not plan on withdrawing money from your IRA until retirement. However, life can prove unpredictable. For example, a layoff, illness, or other unexpected financial issue may tempt you to consider early withdrawals, even if you have to pay taxes or a penalty.

Even if you must put a dent in your retirement progress, at least, you have an asset to draw upon in an emergency. You should still learn how the withdrawal rules for these IRA plan types differ. That way, you can make an informed decision and won’t be surprised with an extra tax and withdrawal penalty.

Highlighted below are the IRS’ current rules to help compare key withdrawal regulations for Roth and traditional IRAs [2]:

Roth withdrawals: You may always withdraw tax-free contributions, but you will pay tax on unqualified earnings. To take qualified earnings distributions, you must be over 59.5 and have held the account for at least five years. You may also qualify up to $10,000 for an earnings exception for a first-time home purchase. You may also earn an exception for all earnings if you’re totally, permanently disabled or the beneficiary of the original deceased IRA owner.
Traditional withdrawals: The IRS won’t penalize you if you delay withdrawals until you’re 59.5 years old. The government will tax withdrawals made with deductible contributions, but you may enjoy a portion of your withdrawal tax-free if you didn’t deduct all of your contributions. Tax rules may also offer specific exceptions to penalties for certain events, like natural disasters.

Roth IRA rules won’t let you deduct contributions. However, more flexible withdrawal regulations and the potential for tax-free earnings can make them an attractive way to plan for future financial security. For example, you might feel more confident about making contributions if you can access them anytime to handle unplanned expenses without a penalty or additional tax.

IRA RMDs

Required minimum distributions (RMDs) may also factor into the choice between traditional and Roth IRAs. For example, some people may have planned to delay taxes by postponing withdrawals from tax-deferred accounts until they run out of other income sources. Others try to delay taxes even longer by leaving their retirement accounts as an inheritance to beneficiaries.

IRS regulations discourage delaying withdrawals from IRA accounts for too long. They can force you to begin taking distributions from your account by a certain age or within a specific time frame. For example:

Roth IRA RMDs: The government doesn’t impose RMDs on Roth withdrawals. Certain beneficiaries of an inherited account will need to take the required minimum distributions. In most cases, you’re free to leave your money in your account as long as you want.
Traditional IRA RMDs; The IRS forces you to begin distributions from a traditional IRA by April 1 of the year after you turn 73. [3] Other rules govern RMDs for beneficiaries. Failure to take these required distributions on time can result in high tax penalties. Due to the timing of the first RMD, proper tax planning is required to avoid doubling up on our first RMD in the same tax year.

You might answer some questions to decide if the difference between Roth and traditional RMD rules will impact your future plans:

Do you plan to save your retirement savings until later in your retirement? Many people survive for decades after retirement. They may want to set aside their IRA for later retirement as protection against depleting other assets.
Could your IRA be part of the estate you want to pass to beneficiaries? You may not need to use up all your assets during your lifetime. You can also name beneficiaries for a traditional IRA, but a Roth IRA‘s more relaxed RMD rules may also benefit them.

Consider a Roth if you plan to enjoy more extended periods of tax-free growth and traditional Ira vs Roth IRA

How much can you contribute to your spouse’s IRA?
If you and your spouse file together, you can each have your own accounts. You each have the same contribution limits, and you or your spouse can add funds to either one’s accounts.

Author Bio

CJ Morris, CPA, CFP®, AIF®, is an experienced financial advisor at CSL CPAs in Sarasota, Florida, specializing in strategic tax planning and comprehensive financial guidance. With a focus on maximizing family and business net worth, CJ integrates personalized tax strategies, investment planning, and wealth management solutions to deliver results for his clients. He is dedicated to understanding each individual’s unique financial goals and tailors his approach to pursue long-term success. Through years of professional experience and a commitment to client-focused service, CJ offers expert insights that empower clients to make informed, confident financial decisions.

Disclosure:

Investment advisory services are offered through Avantax Advisory ServicesSM and Avantax Planning PartnersSM, a registered investment adviser. Securities offered through Avantax Investment ServicesSM, Member FINRA, SIPC. Insurance services offered through licensed agents of Avantax Insurance AgencySM, Avantax Insurance ServicesSM, and Avantax Planning Partners. 3200 Olympus Blvd., Suite 100, Dallas, TX 75019, 972-870-6000.

Although Avantax does not provide or supervise tax or accounting services, our Financial Professionals may offer these services through their independent outside business. Not all Financial Professionals are licensed to offer all products or services. Financial planning and investment advisory services require separate licenses.

The views and opinions presented in this article are those of CJ Morris and not of Avantax Wealth Management® or its subsidiaries.

Limitations and Early Withdrawals: Some IRAs have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney.

Retirement Plans: Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty.

Roth IRA: Converting from a traditional IRA to a Roth IRA is a taxable event.

A Roth IRA offers tax free withdrawals on taxable contributions.

To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.