There are multiple savings vehicles available to help you save for retirement, but having options can be overwhelming. Each option comes with different rules leading to a variety of potential outcomes in the short-term and long-term.
It’s not that dissimilar to choosing what to eat. There are options that are satisfying in the short-term but may necessitate a more vigorous workout later to compensate. Other menu options might be less satisfying immediately but reduce the need to work out as intensely afterward.
Similar to how different foods affect the way the body is fueled, retirement contribution choices affect the fuel for retirement. How you save is just as important as how much you save.
Traditional IRA vs. Roth IRA
One example of two similar, yet very different, retirement saving vehicles are traditional IRAs and Roth IRAs. Both are Individual Retirement Accounts, meaning the account is opened and funded by the worker and is a tax-advantaged account designed for retirement savings. Certain other types of retirement accounts are sponsored by employers and can be funded with both worker and employer contributions.
Traditional and Roth IRAs can be distinguished by their tax treatment. So how do they differ, and how can each fuel retirement?
Traditional IRA
The traditional IRA is what usually comes to mind when hearing about an IRA. The features commonly associated with a traditional IRA include tax-deductible contributions and tax-deferred growth. Because traditional IRA contributions are made during income-earning years for a time when earned income ends or is reduced (and tax liabilities are frequently lower), it can be a nice way to reduce the current income tax liability while also targeting retirement saving goals.
Traditional IRAs provide tax benefits at the point of contribution for those within the income limits for qualification of a tax deduction. Whether an employer-sponsored retirement plan is offered also affects the income limits for contribution deductibility. In 2026, for example, the Modified Adjusted Gross Income (MAGI) limits are as follows:
| Single/Head of Household | Married Filing Jointly | Married Filing Separately | |
| No Employer Retirement Plan | No Limit | Phase Out
$242,000–$252,000
No limit if spouse is not covered by a plan |
Phase Out
$1–$10,000
No limit if spouse is not covered by a plan |
| Employer Retirement Plan | Phase Out
$81,000–$91,000 |
Phase Out
$129,000–$149,000 |
Phase Out
$1–$10,000 |
If MAGI exceeds the limits to qualify for an income tax deduction, contributions to a traditional IRA can still occur. The nondeductible IRA contributions will not provide an income tax deduction, but the account will still benefit from tax-deferred growth.
The tradeoff for tax-deductible contributions is taxable distributions. Traditional IRA distributions can occur at any time but may be subject to an additional 10% penalty if the account owner is under the age of 59½. Distributions of pre-tax contributions and the resulting earnings can be included in taxable income. Alternatively, nondeductible contributions increase basis in the account, and distribution of the basis is not taxable. The earnings, however, on nondeductible contributions are taxable.
Leaving the assets inside the account to avoid taxable distributions cannot continue indefinitely. At age 73 (or age 75 if born in or after 1960), a minimum amount must be distributed from traditional IRAs. These distributions are known as required minimum distributions (RMDs), and the penalty for failure to take the distribution is 25% of the shortfall (10% if the RMD is corrected in a timely fashion).
Roth IRA
Like the traditional IRA, a Roth IRA benefits from tax-deferred growth. Unlike the traditional IRA, Roth account contributions are not tax-deductible. Roth accounts, however, have two attractive features the IRA does not offer: the potential for tax-free distributions and no required minimum distribution.
Because minimum distributions are not required, Roth accounts can benefit from tax-deferred growth until the account owner chooses to take a distribution. Roth assets can be used to manage taxable income during retirement by providing a tax-free stream of income, and funds not withdrawn before death maintain their tax character for the account beneficiary.
Only qualified Roth distributions are tax-free and penalty-free, so it’s a good idea to know the requirements for a distribution to be qualified:
- Over age 59½ AND at least five years have passed since the Roth was first opened and funded
- Death or disability
- Qualified first-time home purchase
Non-qualified distributions are subject to a 10% penalty unless an exception applies:
- Distributions part of a series of substantially equal payments (greater of five years or age 59½)
- Unreimbursed medical expenses exceeding 10% AGI
- Medical insurance premiums after a job loss
- Distributions not more than qualified higher education expenses (self or eligible family)
- Distributions due to an IRS levy
- Qualified reservist distribution
- Qualified disaster recovery assistance distribution
Not everyone is eligible to contribute directly to a Roth IRA. Income limits, based on MAGI, exist as follows:
| Single/Head of Household | Married Filing Jointly | Married Filing Separately |
|
Phase Out $153,000–$168,000
|
Phase Out
$242,000–$252,000 |
Phase Out
$1–$10,000 |
Roth IRA Conversion
Individuals not eligible to save directly into a Roth IRA could consider a backdoor Roth IRA contribution. The backdoor Roth contribution is a two-step process beginning with a nondeductible contribution to a traditional IRA. Then the contribution is converted to a Roth. Individuals with existing traditional IRA balances, especially if the result of tax-deductible contributions, should work closely with their advisor because the conversion could be a taxable event.
For those eligible to make tax-deductible IRA contributions and full Roth IRA contributions, it can be tough to decide which account to contribute or the best combination among the two. The maximum contribution amount to traditional and Roth IRAs in 2026 is $7,500, and those aged 50 and over may also make a catch-up contribution of an additional $1,100. That $7,500 contribution can be made entirely to a traditional IRA, entirely to a Roth IRA, or a combination of the two, as long as the contribution amount in total does not exceed the limit and catch-up amount, if applicable.
Choosing the Best Option for You
Just as dietary choices have short-term and long-term implications, traditional and Roth IRA contributions have variances in their short-term and long-term impact. Choosing which IRA works for you is best done with careful consideration, and it all starts with making the decision to build wealth for the future. Connect with an advisor today to determine which choice is right for you.
This article is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.
Some IRAs have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney.
Distributions from traditional IRA’s and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10% IRS tax penalty.
Converting from a traditional IRA to a Roth IRA is a taxable event.
A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.
