Traditional IRA v. Roth IRA

Traditional IRAs and Roth IRAs differ in several ways:

Traditional IRAs allow you to make pre-tax contributions, which can lower your taxable income for the year. But you will pay taxes on the money that you withdraw in retirement.

In contrast, Roth IRAs allow you to make after-tax contributions, meaning you won't get a tax deduction in the year you contribute. However, your withdrawals in retirement will be tax-free.

Contribution limits to an IRA can change from year to year. For the 2023 tax year, the contribution limit for a traditional IRA is $6,500 for individuals under age 50, and $7,500 for those 50 and older; but you cannot contribute more than your taxable compensation for the year.^[1] The contribution limit for a Roth IRA is the same as a traditional IRA. However, there are income limits for Roth IRA contributions that depend on filing status and income. You can contribute the maximum amount to a Roth IRA if your income is under $138,000 ($218,000 if married filing jointly).^[2]

Note that the annual contribution limits are for combined contributions for all your IRAs (both traditional and Roth IRAs), so you can't contribute $6,500 to a traditional IRA and another $6,500 to a Roth IRA.

Spouses who file a joint return:

• Each spouse can contribute to the current limit, but the combined contributions can't be more than the taxable compensation reported on the joint return. ^[3]
• A spouse can contribute to an IRA if that spouse doesn't have taxable compensation as long as the other spouse does.^[4]

Additionally, traditional IRAs have required minimum distributions (RMDs) starting at age 73, while Roth IRAs have no RMDs.^[5]

Should you contribute to a traditional IRA or a Roth IRA? The general rule is that a Roth IRA is superior when your current tax bracket is lower than your expected future tax bracket, meaning the tax rate on the contribution is lower than the expected tax rate on withdrawals.