Many of us all but ignore our retirement accounts for much of our working lives—most likely only vaguely aware of the portion of our paychecks going into our 401(k)s. If this describes you, it’s time to give retirement savings more attention—particularly in the case of IRAs.
An IRA is one of the most powerful retirement savings tools available, and the most common options are a traditional IRA and a Roth IRA. Which one of these might work best for you? That depends on your overall financial plan and a variety of other factors.
Let’s look at the basics of the traditional versus Roth IRA to see which one could be a good choice for your wealth journey. The differences range from glaring to subtle, and the more intentional you are about the choice, the more you can end up saving in the long run.
The Basics
The IRA, or individual retirement account, was created by the U.S. government to encourage saving for retirement and curb financial distress among retired individuals. Because this savings vehicle is intended for retirement, accessing the funds before age 59½ will come with penalties in most cases.
Traditional IRAs were introduced during the Employee Retirement Income Security Act of 1974 (ERISA) and first gained widespread popularity in the 1980s. Roth IRAs were introduced in 1997, named after Senator William Roth, who was integral in creating this variation.
Both the Roth and traditional IRA have a contribution limit in 2025 of $7,000 per year, $8,000 if you’re 50 or older. The contribution deadline for any IRA typically mirrors the deadline to file your tax return. For example, you could make IRA contributions that applied to the 2024 contribution limit until April 15 of 2025.
How Are IRAs Taxed?
The most noticeable difference between a traditional versus a Roth IRA is when you pay your taxes. Contributions to traditional IRAs are made with pre-tax dollars, and growth is tax-deferred. That means the gains are taxed upon withdrawal. So while the taxman does still knock, he knocks later—potentially when you have a lower taxable annual income.
If you have a Roth IRA, your contributions are made with after-tax dollars. The growth is tax-free, and withdrawals in your retirement years are almost always tax-free as well because you’ve paid taxes upfront.
Generally, those in a high tax bracket today typically benefit more from a traditional IRA than those in a lower tax bracket. And those who are in a low tax bracket today typically benefit more from a Roth IRA than those in a higher tax bracket.
Let’s look at two scenarios in which both plans are advantageous for certain reasons. Each financial journey is unique, so a blanket answer won’t work for IRAs or other financial choices.
- Scenario 1 – Our investor in 2025 is in the wealth-building phase, has earned income putting her in the 22% tax bracket, and is not participating in an employer-sponsored plan. She determines she can put $7,000 into her traditional IRA, effectively reducing her current income from $100,000 to $93,000 and saving her $1,540 in taxes. When she reaches retirement, her taxable income reduces greatly to $30,000 and places her in a lower tax bracket of 12%. At this time, she needs additional income and decides to pull it from her traditional IRA. If she were to take a $7,000 distribution, she would pay $840 in taxes. That’s significantly less than what she would have paid on the $7,000 if she decided not to contribute to her traditional IRA.
- Scenario 2 – The investor is early on in his career. He’s on the high end of the 12% tax bracket, earning $45,000 a year. He starts a Roth IRA and contributes the maximum $7,000, paying $840 in taxes right away. After a long successful career, he retires and has a fixed income of $75,000 a year, placing him firmly in the 22% tax bracket. In the event he needed additional income, he could take a distribution from his Roth IRA and pay $0 in taxes since he already prepaid his tax bill when he made his contribution.
These are simplified scenarios to illustrate the tax advantages of each IRA. Everyone’s situation is unique, and there may be factors other than your tax bracket that could influence which account is right for you.
How Do I Get Access to the Money in My IRA?
As with any financial tool, there are rules about accessing IRA funds. Remember, the IRS is trying to encourage saving for retirement, so they don’t want you to take the money early.
Age 59½ is the magical no-penalty withdrawal age for traditional and Roth IRAs. With a Roth, the earnings on your contributions will be taxed if you withdraw them before this age. So if you deposited $7,000 and it grew to $10,000 and you withdrew that full amount, you’d pay taxes on $3,000. After age 59½, there is no penalty.
Traditional IRA
We’ve already discussed the magical age of 59½, which applies to all IRAs. If you take your money out early from a traditional IRA, you will pay not only taxes on the contributions and the growth but also a 10% early withdrawal penalty tax.
There are exceptions to these penalties, however. You can possibly take an early withdrawal if you qualify for a hardship distribution. You can also take out $10,000 the first time you build or buy a home, and if you’re married, your spouse can take that distribution as well. These distributions and a handful of others can help you gain access to the funds while avoiding early withdrawal penalties.
Roth IRA
One of the perks of a Roth IRA is that the money is considered yours because you’ve already paid the taxes (as long as you take it at the correct age). There are still a few catches, though.
Although contributions to a Roth are always accessible, you have to wait five years after opening a Roth before you can withdraw your earnings without penalty. Keep in mind that this is five years from when you start your first Roth account. You could start an account, wait the five years, start another one, and you would meet the five year rule for all of your Roth accounts.
Restrictions and Parameters with IRAs
When the IRS gives you breaks or privileges with a financial vehicle, you can be sure there are restrictions on it as well. We’ve already discussed the contribution limit for both IRA types—$7,000, or $8,000 if you’re over age 50 (as of 2025).
Restrictions for a Traditional IRA
There are no income limits to be able to contribute to a traditional IRA, but your tax deductions run into limits if you or your spouse are covered by a retirement plan at work. For 2025, if you make more than $79,000 a year (modified adjusted gross income), you start to reach the phase-out range and will only receive a partial deduction for contributions. After your income reaches $89,000, you will no longer receive any tax deduction. For married couples filing jointly, phaseout starts at $126,000, and the deduction disappears altogether above $146,000 in income. If you fall into the “married filing jointly” category and don’t have access to a work retirement plan, but your spouse does, those number shift to $236,000 and $246,000 respectively.
Restrictions for a Roth IRA
The incredible financial planning opportunity available with a Roth comes with income restrictions. Essentially, if you make too much money, you can’t contribute to a Roth account. For 2025, you hit the phase-out threshold at $150,000 and the ceiling is $165,000 for individual filers. For married couples filing jointly, the phaseout starts at $236,000 and ends above $246,000.
If your income prevents you from currently contributing to a Roth, strategies such as Roth IRA Conversions could help you work creatively within the savings vehicle’s limitations.
Powerful Tools in the Right Hands
As you can see, the IRA is a powerful savings vehicle for retirement and can put your money to work for you more efficiently with tax advantages. Whether you go with a traditional or a Roth IRA is a matter of weighing the details against your individual situation.
Talk with your financial advisor about what works for where you are in your wealth journey and your particular dreams for retirement. The important thing is to get started!
Get in touch today, and let’s see what could work for you!
Distributions from traditional IRAs and employer-sponsored retirement plans are taxed as ordinary income and, if taken prior to reach age 59½, may be subject to an additional 10% IRS tax penalty. A Roth IRA offers tax-free withdrawals on taxable contributions. To qualify for tax-free and penalty-free withdrawal on earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59½ 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.
Michael Gruidel is a non-producing registered rep of Cetera Advisor Networks LLC. Cetera Advisor Networks LLC is under separate ownership from any other named entity.
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