How Each Account Is Taxed
Both the Roth IRA and Traditional IRA are individual retirement accounts designed to help people save for retirement with favorable tax treatment. The core difference comes down to when your money gets taxed.
With a Roth IRA, you contribute money you've already paid income tax on. In exchange, your investments grow tax-free, and qualified withdrawals in retirement — generally after age 59½ and after the account has been open at least five years — are completely tax-free.
With a Traditional IRA, your contributions may be tax-deductible depending on your income and whether you have a workplace retirement plan. The upside is a potential reduction in taxable income today. The trade-off: withdrawals in retirement are taxed as ordinary income, and required minimum distributions (RMDs) start at age 73.
If you're new to the idea of tax-advantaged accounts, it helps to first understand the basics covered in our guide to opening your first investment account.
| Criterion | Roth IRA | Traditional IRA |
|---|---|---|
| Tax on contributions | After-tax (no deduction) | Pre-tax (may be deductible) |
| Tax on withdrawals | Tax-free (if qualified) | Taxed as ordinary income |
| Income limits to contribute | Yes — phases out at higher incomes | No limit to contribute; deductibility may be limited |
| Required minimum distributions | None during owner's lifetime | Required starting at age 73 |
| Early withdrawal of contributions | Anytime, penalty-free | Subject to taxes and 10% penalty before 59½ |
| Best tax environment | Lower tax rate now, higher later | Higher tax rate now, lower later |
| 2024 contribution limit | $7,000 ($8,000 if 50+) | $7,000 ($8,000 if 50+) |
Eligibility, Income Limits, and Contribution Rules
For tax year 2024, both account types share the same annual contribution limit: $7,000 (or $8,000 if you're 50 or older). This limit applies across all your IRAs combined — you can't double it by having both types.
However, Roth IRA eligibility phases out at higher incomes. Single filers begin to see reduced contribution limits once their modified adjusted gross income (MAGI) exceeds $146,000, and the ability to contribute phases out completely at $161,000. For married couples filing jointly, the phase-out range is $230,000–$240,000. If your income exceeds these thresholds, you generally cannot contribute directly to a Roth IRA.
Traditional IRA contributions are available to anyone with earned income, regardless of how much they make — but the tax deductibility of those contributions may be limited if you or your spouse have access to a workplace retirement plan and your income exceeds certain thresholds.
What Counts as Earned Income?
To contribute to either type of IRA, you need earned income — meaning wages, salaries, tips, self-employment income, or alimony in some cases. Passive income sources like dividends or rental income don't count. Your contribution cannot exceed your total earned income for the year, even if that amount is below the standard limit.
Regardless of which account you choose, investing early creates more time for compound growth. Our article on short-term vs. long-term investing explains why time horizon matters so much in retirement planning.
Which Account Makes More Sense for Young Investors?
Tax bracket trajectory is the central question. If you're early in your career, you're likely in a lower tax bracket than you'll be at peak earning years. That makes the Roth IRA particularly appealing — you pay a relatively modest tax rate on contributions now and receive completely tax-free income in retirement, when your tax rate could be higher.
There's also a flexibility advantage: Roth IRA contributions (not investment earnings) can be withdrawn at any time, penalty-free. This makes it slightly less intimidating for those worried about locking money away indefinitely.
A Traditional IRA makes more sense if you expect your income — and therefore your tax rate — to be meaningfully lower in retirement than it is today. The deduction reduces your taxable income now, when it's most valuable to you.
$7,000
2024 annual IRA contribution limit
Per IRS rules, this limit applies to combined contributions across all IRA accounts you hold for the tax year.
Age 73
When Traditional IRA RMDs begin
Under the SECURE 2.0 Act, required minimum distributions from Traditional IRAs must begin at age 73 — a change from the prior age of 72.
0%
Tax rate on qualified Roth withdrawals
Qualified Roth IRA distributions in retirement are federally tax-free, provided the five-year rule and age requirements are met.
It's worth noting that these accounts are not mutually exclusive with other investing approaches. Pairing an IRA with a workplace 401(k) is common and can accelerate retirement savings further. You can also explore how retirement account investing compares to other strategies through our comparison of index funds and actively managed funds.
This article is for general informational and educational purposes only. It does not constitute personalized financial, tax, or investment advice. Please consult a licensed financial advisor or tax professional before making decisions about your retirement accounts.
