Deciding between a Roth IRA or a traditional IRA generally comes down to which tax bracket you think you’ll be in at retirement. If you think you’ll be in a higher one than you are today, a Roth IRA may work for you because it allows tax-free withdrawals at retirement.
But a traditional IRA offers tax-deductible contributions. That means you can lower your tax bill now by investing in a traditional IRA. You’d pay taxes on withdrawals at retirement, but taking large tax deductions now may outweigh paying a smaller tax rate down the road.
Another deciding factor is your income. If your modified adjusted gross income (MAGI) in 2021 is greater than $140,000 or $208,000 if married and filing jointly, you can’t open a Roth IRA.
|Contribution limits for 2020 and 2021||$6,000, or $7,000 if 50 or older||$6,000, or $7,000 if 50 or older|
|Income limits for 2020|
- You can open an account and contribute up to the limit if you’re MAGI is less than $124,000, or $196,000 if married filing jointly
- Contribution limits reduce at MAGI of $124,000, or $196,000 if married filing jointly
- Can’t contribute if MAGI is $139,000, or $206,000 if married filing jointly or more
- Anyone with earned income can open an account but tax-deductible contributions begin to phase out based on MAGI and whether you or your spouse have a workplace retirement plan like a 401(k)
|Income limits for 2021|
- You can open an account and contribute up to the limit if you’re MAGI is less than $125,000, or $198,000 if married filing jointly
- Contribution limits reduce at MAGI of $125,000, or $198,000 if married filing jointly
- Can’t contribute if MAGI is $140,000, or $208,000 if married filing jointly or more
- Withdraw contributions penalty- and tax-free any time
- Earnings grow tax-free
- No tax-deductible contributions
- Tax-deductible contributions
- Earnings grow tax-deferred
- Pay taxes on contributions and earnings at retirement
- Tax and penalty-free withdrawals if you’re at least 59.5 years old and account has been open for at least five years
- Penalty-free withdrawals at age 59.5
|Required minimum distribution (RMD) rules||None||RMDs begin at age 72|
|Tax credits||Eligible for up to $1,000 in Saver’s Credit depending on income||Same rules as for Roth IRA|
The main difference between a Roth IRA and a traditional IRA is the timing of tax benefits. With a traditional IRA, you can deduct your contributions from your state and federal tax bills each year.
However, your contributions and their investment earnings are tax-deferred. That means you’ll pay taxes on these later, when you retire. As long as you make withdrawals when you’re at least 59.5 years old, you’ll pay regular income tax on your distributions for the year you made the withdrawal.
With a Roth IRA, you can’t make tax-deductible contributions now. But withdrawals are tax-free if you’re at least 59.5 years old and your account has been open for at least five years from the date you made your first contribution. If your account has posted big gains over the years, that can be a big tax break.
Plus, you’re able to withdraw your contributions any time tax-free and without penalty. Traditional IRAs won’t allow you to do this. But keep in mind, with this provision we’re talking about the money you put into a Roth IRA and not any interest or market returns you’ve earned.
IRA Income limits and contribution limits
Anyone with earned income can contribute to a traditional IRA. But the amount you can deduct varies based on modified adjusted gross income (MAGI) if you or your spouse has an employer-sponsored retirement plan like a 401(k).
Single or head of household
|$65,000 or less||$66,000 or less||Up to the contribution limit: $6,000, or $7,000 if you’re 50 or older|
|More than $65,000 but less than $75,000||More than $66,000 but less than $76,000||Reduced deduction|
|$75,000 or more||$76,000 or more||No deduction|
Married filing jointly
|$104,000 or less||$105,000 or less||Up to the contribution limit: $6,000, or $7,000 if you’re 50 or older|
|More than $104,000 but less than $124,000||More than $105,000 but less than $125,000||Reduced reduction|
|$124,000 or more||$125,000 or more||No deduction|
Married filing separately
|Less than $10,000||Less than $10,000||Reduced deduction|
|$10,000 or more||$10,000 or more||No deduction|
Roth IRA income limits and contribution limits
Whether you can open a Roth IRA and how much you can contribute depends on your MAGI.
Single, head of household, or married filing separately
|<$124,000||<$125,000||$6,000, or $7,000 if you’re 50 or older|
|>$124,000 but <$139,000||>$125,000 but <$140,000||Reduced contribution|
Married filing jointly or qualifying widow(er)
|<$196,000||<$198,000||$6,000, or $7,000 if you’re 50 or older|
|> $196,000 but <$206,000||> $198,000 but <$208,000||Reduced Contribution|
|> $206,000||> $208,000||No contribution|
Married filing separately and you lived with your spouse at any time during the year
You can contribute to a traditional and Roth IRA only with earned income.
- Wages, salaries and tips from an employer or from self-employment
- Professional fees
- Nontaxable combat pay
However, you can’t fund a Roth IRA with other sources of income which the IRS considers to be “unearned income” for tax purposes. This includes the following:
- Interest and dividends from investments and pension plans
- Social Security benefits
- Unemployment benefits
You can begin taking penalty-free distributions from your Roth IRA or IRA at age 59.5. A traditional IRA requires you take a required minimum distribution (RMD) at age 72. A Roth IRA requires no RMDs.
The early withdrawal penalty on traditional IRAs and Roth IRAs is generally 10% of the distribution.
If you make an early withdrawal from a traditional IRA, you’d also owe income tax on the distribution for the year you made the withdrawal. You can withdraw your contributions from your Roth IRA any time without owing a penalty or taxes. But an early withdrawal may trigger penalties and taxes on the earnings.
For Roth IRAs, you can waive the early withdrawal penalty but not taxes in a few ways.
- Use up to $10,000 (lifetime max) to purchase your first home.
- Use the money to fund qualified education expenses.
- Use the funds to pay for qualified expenses related to a birth or adoption of a child.
- Use the distribution to pay for unreimbursed medical expenses or health insurance if you’re unemployed.
- You become disabled
Depending on your adjusted gross income (AGI), you may be eligible for the Saver’s Credit. This applies to both traditional and Roth IRAs. A Saver’s Credit is a non-refundable tax credit available to those who make contributions to traditional or Roth IRAs, as well as employer-sponsored retirement plans. The credit depends upon income levels, but it could be worth 10%, 20% or 50% of a person’s contributions, subject to a cap.
|50% of your contribution||AGI not more than $39,500||AGI not more than $29,625||AGI not more than $19,750|
|20% of your contribution||$39,501 – $43,000||$29,626 – $32,250||$19,751 – $21,500|
|10% of your contribution||$43,001 – $66,000||$32,251 – $49,500||$21,501 – $33,000|
|0% of your contribution||more than $66,000||more than $49,500||more than $33,000|
Can you have both a traditional and a Roth IRA?
If you’re eligible to contribute to both plans, it’s possible to open a traditional IRA and a Roth IRA as part of an overall retirement planning strategy. But your applicable contribution limit each year applies to your combined IRA and Roth IRA deposits.
Having both would give you taxable and tax-free accounts to draw from at retirement. But it may not be practical for everyone. Discuss your options with a financial adviser.
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A Roth IRA may be more beneficial if you expect to retire at a high tax bracket because it offers tax-free withdrawals. But traditional IRAs let you make tax-deductible contributions in your working years.
Even so, management fees can diminish your return in either account. That’s why you might want to compare brokerage platforms before you open a Roth IRA or a traditional IRA.
How can I open a traditional IRA or a Roth IRA?
You can open either account at most banks or brokerages — simply visit their website or a branch. Be ready with your Social Security number, external bank info and proof of income.
Do traditional and Roth IRAs charge fees?
That depends on the financial institution that holds your account. Some charge management fees while others waive them. Others may also waive expense ratios for some investment funds.
What if I open a traditional or Roth IRA for my child?
Both Roth IRAs and traditional IRAs have no age restrictions — but your child must have earned income. A job that pays wages or tips would satisfy this.