Traditional IRA vs Roth IRA: What’s the Difference?

Source: Thinkstock

Source: Thinkstock

Saving for retirement is a major obstacle for Americans. A 401(k) plan is the most common vehicle to place money aside for employees who are fortunate enough to do so, but what about the millions of people who don’t have access to a plan through their employer? An individual retirement account (IRA) may be the best option for these workers. There are two main types of IRAs: Traditional and Roth. Both are designed to help you save for retirement. However, there are some key differences between the two.

Tax Benefits

A Traditional IRA experiences tax-deferred growth, which means you contribute pre-tax dollars and pay ordinary income taxes when you make withdrawals in retirement. Depending on your income and if your spouse is already covered by a retirement plan at work, your contributions may also be tax-deductible.

A Roth IRA grows tax-free, meaning you contribute dollars after Uncle Sam takes his cut, and you won’t pay taxes on withdrawals as long as you take them after you have reached age 59 1/2 and owned the account for at least five years. A Roth IRA is generally recommended for younger savers or people who believe their tax responsibilities will be greater at retirement.

Income Limits

A Traditional IRA has no income limits. A Roth IRA has income limits (modified adjusted gross income). As the chart below shows, there are different limits to consider for 2015, depending on your filing status.

Source: IRS

Source: IRS

These limits are reviewed on a yearly basis by the Internal Revenue Service to account for inflation, so it’s important to check for updates. For tax year 2015, the IRS made the following changes to the Roth IRA income limits.

“The AGI phase-out range for taxpayers making contributions to a Roth IRA is $183,000 to $193,000 for married couples filing jointly, up from $181,000 to $191,000 in 2014. For singles and heads of household, the income phase-out range is $116,000 to $131,000, up from $114,000 to $129,000. For a married individual filing a separate return, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.”

Here are the Roth IRA income limits for 2016:

Source: IRS

Source: IRS

Who May Contribute?

In order to contribute to a Traditional IRA, you must be under age 70 1/2. On the other hand, there is no age limit for a Roth IRA. Both IRAs generally require you to have taxable compensation.

Maximum Contribution

In tax year 2015, the maximum contribution for a Traditional IRA and Roth IRA is $5,500 or 100% of your taxable compensation per year, whichever is less. If you’re age 50 or older, you may contribute an extra $1,000 to either IRA type, known as the “catch-up” contribution. The IRS recently announced that these amounts will remain the same for 2016, but the maximum contribution amount is raised from time to time so savers should pay attention for any changes. The deadline for both IRA contributions is typically the tax deadline. For example, you have until April 18, 2016 to make your 2015 IRA contribution.

Minimum Required Distributions

A Roth IRA is not subject to minimum required distributions during the lifetime of the original owner. However, you must start taking distributions in a Traditional IRA by April 1 following the year in which you turn age 70 1/2, and by December 31 of later years.


If you feel unable to leave your retirement savings alone until a specific age, a Traditional IRA probably isn’t a wise choice. Any deductible contributions and earnings you withdraw or that are distributed from your Traditional IRA are taxable. If you are under age 59 1/2 you may have to pay an additional 10% tax for early withdrawals unless you qualify for an exception. With a Roth IRA, there are no penalties on withdrawals of your contributions. However, there is still a 10% penalty on withdrawals of earnings unless an exception applies.


You may be able to avoid the 10% penalty on both IRAs if the distribution is due to death, disability, qualified higher education expenses, or medical expenses. First-time homebuyers may also take a distribution penalty free, up to $10,000.


Numerous strategies are available for savers trying to maximize their financial situations. For example, you don’t necessarily have to pick one type of IRA over the other. You may have a Traditional IRA as well as a Roth IRA. The same $5,500 ($6,500 if age 50 or older) limit applies for your combined contribution total. Furthermore, if your income prevents you from contributing directly to a Roth IRA, you may be able to contribute to a Traditional IRA and then convert those nondeductible contributions to a Roth IRA, known as a Backdoor Roth IRA.

Follow Eric on Twitter @Mr_Eric_WSCS