What's the Difference Between a Roth IRA and a Traditional IRA?

This is the most common investing question people ask after "where do I even start?" — and for good reason. Roth IRA and Traditional IRA sound almost identical, but they work in completely opposite ways when it comes to taxes. The wrong choice won't ruin you, but the right one can put thousands of extra dollars in your pocket over a lifetime.

Let's break down exactly how each one works so you can pick the one that fits your situation.

How Does a Traditional IRA Work?

A Traditional IRA gives you a tax break now. You contribute money, deduct it from your taxable income this year, and your investments grow tax-deferred. When you withdraw the money in retirement, that's when you pay income tax on it.

Think of it as a deal with the IRS: "I'll pay you later."

The key details:

• Contributions may be tax-deductible depending on your income and whether you have a workplace retirement plan
• Your investments grow tax-deferred — no taxes on gains until withdrawal
• Withdrawals in retirement are taxed as ordinary income
• Required Minimum Distributions (RMDs) kick in at age 73 — the IRS eventually wants their cut
• Early withdrawals before 59½ typically trigger a 10% penalty plus taxes

The 2026 contribution limit is $7,000 if you're under 50, or $8,000 if you're 50 or older (that extra $1,000 is the catch-up contribution).

How Does a Roth IRA Work?

A Roth IRA flips the script. You contribute money you've already paid taxes on — no deduction today. But your investments grow tax-free, and when you pull the money out in retirement, you pay zero taxes on it. Not on the gains, not on the contributions, nothing.

The deal with the IRS here: "I'll pay you now and never again."

The key details:

• Contributions are NOT tax-deductible — you fund it with after-tax dollars
• Your investments grow completely tax-free
• Qualified withdrawals in retirement are 100% tax-free
• No Required Minimum Distributions — your money can grow untouched as long as you want
• You can withdraw your contributions (not gains) anytime without penalty — this makes it a flexible backup option

The catch: there are income limits. For 2026, single filers start getting phased out around $150,000–$165,000 in modified adjusted gross income (MAGI), and married filing jointly around $236,000–$246,000. If you earn above those thresholds, you can't contribute directly to a Roth (though the "backdoor Roth" strategy exists — that's a topic for another post).

Same contribution limits apply: $7,000 under 50, $8,000 if you're 50+.

Which One Should You Pick?

This comes down to one core question: do you think your tax rate will be higher now or in retirement?

Lean toward a Roth IRA if:

• You're early in your career and in a lower tax bracket now
• You expect your income (and tax rate) to rise over time
• You want tax-free income in retirement for maximum flexibility
• You like the idea of no RMDs — full control over your money

Lean toward a Traditional IRA if:

• You're in a high tax bracket now and want to reduce this year's tax bill
• You expect to be in a lower bracket in retirement
• You need the upfront deduction to free up cash flow
• You're maxing out other tax-advantaged accounts and want every deduction available

For most people in their 20s and 30s, the Roth IRA tends to win. You're likely earning less now than you will later, which means you're paying taxes at a lower rate today in exchange for tax-free growth over decades. That's a powerful trade. If you're not sure what tax bracket you're actually in (most people get this wrong), this breakdown explains how marginal rates work.

If you're already saving a solid percentage of your paycheck and want to put that money to work, an IRA is one of the best places to start.

Can You Have Both?

Yes — and a lot of people don't realize this. You can contribute to both a Roth IRA and a Traditional IRA in the same year. The only rule is that your combined contributions can't exceed the annual limit ($7,000 or $8,000 depending on age).

So you could put $4,000 in a Roth and $3,000 in a Traditional if you wanted. Whether that makes sense depends on your tax situation, but it's absolutely allowed.

You can also have an IRA alongside a 401(k) through your employer. They're separate buckets with separate limits — stacking them is one of the best moves you can make for building long-term wealth. For a full rundown of all the tax-advantaged accounts available to you, check out our guide to 401(k)s, IRAs, HSAs, and more.

The Bottom Line

Don't overthink this. Both IRAs are powerful tools, and either one puts you ahead of the majority of Americans who aren't investing for retirement at all. The biggest mistake isn't picking the "wrong" IRA — it's not opening one because you got stuck comparing the two.

If you're younger and in a lower bracket, go Roth. If you're in a high bracket and want the tax deduction now, go Traditional. If you're somewhere in the middle, you genuinely can't go wrong with either.

The most important step is opening the account and funding it. You can always adjust your strategy later.

Ready to start investing? Download our free Investing Starter Kit for a step-by-step walkthrough.