Saving for retirement often involves choosing between a Roth IRA and a traditional IRA. Both options provide tax benefits, but the timing of these benefits can differ. This affects your future income, required minimum distributions (RMDs), and estate planning.
Knowing the differences between a Roth IRA and a traditional IRA can help you choose wisely. For tax-free withdrawals in the future, consider your current tax bracket and expected retirement income.
Quick Comparison: Roth IRA vs. Traditional IRA
| Feature | Traditional IRA | Roth IRA |
|---|---|---|
Income eligibility |
No income limits for contributions | 2025 modified adjusted gross income (MAGI) limits:
|
Contribution limits |
Up to $7,000 per year; $8,000 if age 50+ |
Same limits as a traditional IRA |
Tax treatment of contributions |
Contributions may be tax-deductible, depending on income and participation in an employer-sponsored plan |
Contributions made with after-tax dollars (not deductible) |
Growth |
Tax-deferred |
Tax-free |
Withdrawals |
Taxed as ordinary income. Penalty for withdrawals before age 59½ (with exceptions) |
Qualified withdrawals after age 59½ are tax-free, as long as the account has been open for at least five years |
RMDs |
Must begin at age 73 (or 75 if born in 1960 or later) |
No RMDs during account owner’s lifetime |
Conversions |
Can convert a traditional IRA to Roth (taxes due in the year of conversion) |
N/A |
Key differences between Roth and traditional IRAs
The biggest difference between Roth and traditional IRAs is when you pay taxes:
- Traditional IRA: You may get a tax deduction now, lowering your taxable income. But you’ll owe income taxes on withdrawals in retirement.
- Roth IRA: You contribute after-tax dollars. In exchange, your withdrawals in retirement — including earnings — are tax-free.
This distinction makes Roth IRAs especially attractive if you expect to be in a higher tax bracket later. On the other hand, traditional IRAs may benefit those who expect to be in a lower bracket in retirement.
Income limits and MAGI phase-outs
Eligibility for a Roth IRA is based on modified adjusted gross income (MAGI). The 2025 phase-out ranges for 2025 are:
- Single: $150,000–$165,000
- Married filing jointly: $236,000–$246,000
Traditional IRAs do not have income limits for contributions. However, you may not be able to deduct your contributions if you or your spouse has a workplace retirement plan.
Contribution rules in 2025
- Annual contribution limit: $7,000 (under 50) or $8,000 (age 50+).
- Contributions must come from earned income.
Withdrawal rules
- Traditional IRA: Withdrawals are taxed as ordinary income. Withdrawals before age 59½ usually have a 10% penalty. Exceptions include first-time home purchases, education costs, and unpaid medical bills.
- Roth IRA: You can withdraw contributions (not earnings) anytime. Qualified withdrawals — after age 59½ and as long as the account has been open for five years — are tax-free.
Required Minimum Distributions (RMDs)
- Traditional IRA: RMDs begin at age 73 (age 75 for those born in 1960 or later).
- Roth IRA: No RMDs for the original account owner. This allows assets to grow tax-free for life.
When a traditional IRA may make sense
A traditional IRA may be the better choice if:
- You want to lower your taxable income today.
- You expect to be in a lower tax bracket during retirement.
- You want to split retirement savings between pre-tax and after-tax strategies.
When a Roth IRA may make sense
A Roth IRA could be the better fit if:
- You expect to be in a higher tax bracket in retirement.
- You want tax-free withdrawals in retirement.
- You want flexibility for estate planning (Roth IRAs can pass tax-free income to heirs).
- Your income level allows Roth contributions without phase-out restrictions.
What to know about backdoor Roth conversions
If your income is too high to contribute directly to a Roth, you may consider a Roth IRA conversion. You can move money from a traditional IRA to a Roth IRA. However, you will have to pay taxes on the amount you convert.
Breaking down Roth conversions
Roth conversions can be a beneficial strategy, particularly when considering lower-income years. Speak with a tax advisor before converting to understand the potential impact on your taxes, MAGI, and Medicare premiums.
SECURE Act and SECURE 2.0 changes
Recent legislation affects both Roth and traditional IRAs:
- No age limit for traditional IRA contributions if you have earned income.
- RMD age increase: now 73 (rising to 75 if born in 1960 or later).
- 529-to-Roth rollovers: Starting in 2024, individuals can transfer some unused 529 college savings into a Roth IRA. Some limits do apply.
- 10-year rule: Most non-spouse beneficiaries must deplete inherited IRAs within 10 years.
FAQs: Roth IRA vs. Traditional IRA
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Both require earned income. Investors make contributions through a brokerage or financial institution. Roth contributions are made after-tax; traditional contributions may be tax-deductible.
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Yes, but the combined total can’t exceed the annual limit ($7,000/$8,000 in 2025).
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Traditional IRA deposits may be deductible and lower taxable income. Roth deposits are made with after-tax dollars but grow tax-free.
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Yes. Early withdrawals for qualified education expenses avoid the 10% penalty, but traditional IRA distributions are taxable. Roth distributions of earnings are taxable if taken before age 59½ or if the account has been open for less than five years.
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Roth IRAs favor those expecting higher retirement taxes; traditional IRAs favor those seeking current tax deductions.
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Yes, but total contributions across all Roth accounts can’t exceed annual IRS limits.
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Yes, but you’ll owe taxes on the converted amount. Many investors use this strategy to secure future tax-free withdrawals. This conversion can be done on a year-by-year basis through the “backdoor” strategy or with a larger lump sum, strategically adding to taxable income in the year of conversion, which can be part of a long-term tax planning strategy.
When you look at a Roth IRA and a traditional IRA, the best option depends on a few factors. These include your income, future taxes, and your retirement goals. Roth IRAs offer tax-free income during retirement and are flexible for estate planning. Traditional IRAs give tax savings now and may be better for those who expect a lower tax rate in retirement.
Ask your advisor whether a Roth, a traditional IRA, or a combination makes sense for you. Not a Mercer Advisors client?
All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. Hypothetical examples are for illustrative purposes only.
