Traditional IRA vs Roth IRA
Quick Answer
A Traditional IRA offers tax-deductible contributions now but taxes withdrawals in retirement. A Roth IRA offers no tax break on contributions but provides completely tax-free withdrawals in retirement. The 2025 contribution limit is $7,000 ($8,000 for age 50+) combined across all IRAs. The right choice depends on your current tax bracket versus your expected bracket in retirement, and whether your income exceeds the phaseout limits.
Key Differences
| Feature | Traditional IRA | Roth IRA |
|---|---|---|
| Tax break on contributions | Yes (if eligible) | No |
| Tax on withdrawals | Ordinary income | Tax-free |
| 2025 contribution limit | $7,000 ($8,000 if 50+) | $7,000 ($8,000 if 50+) |
| Income limit for contributions | None | Phaseout at $150K-$165K (single) |
| Income limit for deduction | Phaseout if covered by work plan | N/A |
| Required Minimum Distributions | Yes (age 73) | No |
| Early withdrawal penalty | 10% before age 59.5 | Contributions: no penalty. Earnings: 10% |
Income Phaseouts for 2025
Traditional IRA Deduction (If You Have a Workplace Retirement Plan)
| Filing Status | Full Deduction | Partial Deduction | No Deduction |
|---|---|---|---|
| Single | AGI < $79,000 | $79,000 - $89,000 | AGI > $89,000 |
| Married Filing Jointly | AGI < $126,000 | $126,000 - $146,000 | AGI > $146,000 |
Roth IRA Contribution
| Filing Status | Full Contribution | Partial | No Contribution |
|---|---|---|---|
| Single | AGI < $150,000 | $150,000 - $165,000 | AGI > $165,000 |
| Married Filing Jointly | AGI < $236,000 | $236,000 - $246,000 | AGI > $246,000 |
Real Example With Actual Numbers
Kim earns $75,000 and is in the 22% federal bracket. She contributes $7,000 to an IRA. She lives in Florida (no state tax).
Traditional IRA
| Item | Amount |
|---|---|
| Contribution | $7,000 |
| Federal tax savings (22%) | $1,540 |
| Actual cost after tax savings | $5,460 |
| After 25 years (7% return) | ~$38,000 |
| Tax on withdrawal (assume 12% bracket) | ~$4,560 |
| Net after-tax value | ~$33,440 |
Roth IRA
| Item | Amount |
|---|---|
| Contribution | $7,000 |
| Tax savings | $0 |
| Actual cost | $7,000 |
| After 25 years (7% return) | ~$38,000 |
| Tax on withdrawal | $0 |
| Net after-tax value | ~$38,000 |
The Roth IRA provides $4,560 more in retirement value in this scenario because Kim drops from the 22% bracket now to 12% in retirement — but the Roth avoids even the 12% tax. If Kim stays in the 22% bracket in retirement, both accounts produce the same after-tax result.
When to Choose Traditional IRA
- Your marginal rate is 22% or higher
- You expect lower income in retirement
- You need the current tax deduction to qualify for other benefits (credits, etc.)
- Your AGI is too high for Roth contributions
- You plan to convert to Roth during low-income years (Roth conversion strategy)
When to Choose Roth IRA
- You are in the 10% or 12% bracket (low current tax cost)
- You are early in your career with a long time horizon
- You expect higher income and tax rates in the future
- You do not want Required Minimum Distributions forcing withdrawals at 73
- You want tax diversification alongside a traditional 401(k)
IRA in Addition to 401(k)
The optimal order for retirement savings:
- Contribute to 401(k) up to the employer match — free money
- Max out HSA if available — triple tax benefit
- Max out Roth IRA (if eligible) — tax-free growth
- Increase 401(k) to the max — $23,500
- Taxable brokerage account — no limits
See how IRA contributions fit into your overall tax picture at the SalaryHog calculator.