February 19, 2020

Roth IRA vs. Traditional IRA: Key Differences and Similarities

Retirement

Money Done Right does not run display ads or accept sponsorships to promote particular products or services. However, we may receive a commission if you purchase or sign up through links on this page. Here's more information about how we make money.

If I have one pet peeve when it comes to IRAs, it’s when some well meaning financial “expert” presents the Roth IRA as the only kind of IRA that matters.

After all — so the story goes — earnings are tax-free in a Roth IRA but only tax-deferred in a Traditional IRA, and doesn’t tax-free sound better than tax-deferred?

Unfortunately this is an overly simplistic view of  the Roth IRA vs. Traditional IRA debate.  Frankly, there’s no one-size-fits-all answer here.

The optimal thing to do in this situation is to sit down with a qualified financial advisor to discuss your current situation as well as your long-term financial goals and let him or her set out a gameplan for you.

But if you don’t have access to professional advice, the best you can do is educate yourself on the differences between Roth IRAs and Traditional IRAs and make an informed choice about which kind of account you will contribute to this year.

Roth vs. Traditional: Similarities

While Roth IRAs and Traditional IRAs are more different than they are similar, they do have some characteristics in common.

1. How Much You Can Contribute

For both the Traditional IRA and the Roth IRA, the maximum you can contribute is the lesser of your earned income for the year or $6,000 ($7,000 if you are age 50 or older) for both 2019 and 2020.

Note that this is the total amount you can contribute to your combined Traditional IRA and Roth IRA accounts.

You cannot contribute $6,000 to a Traditional IRA and an additional $6,000 to a Roth IRA in 2020.

You could, however, contribute some money to a Traditional IRA account and some money to a Roth IRA account as long as your total contribution to both accounts combined does not exceed $6,000 ($7,000 if you are age 50 or older).

2. When You Can Contribute

The deadline to contribute to both a Traditional IRA and a Roth IRA for tax year 2019 is April 15, 2020.

The deadline to contribute to both a Traditional IRA and a Roth IRA for tax year 2020 is April 15, 2021.

As you can see, even if you extend your tax return filing deadline for six months, this extension does not apply to your IRA contribution deadline.

3. Earned Income Requirement

For both Traditional IRAs and Roth IRAs, you must have earned income in order to contribute.

Earned income includes:

  • Salaries and wages
  • Self-employment income
  • Alimony
  • Non-taxable combat pay

The following kind of income is not considered earned income for IRA contribution purposes:

  • Rental income
  • Interest
  • Dividends
  • Annuities
  • Deferred compensation
  • Gambling income

4. Retirement Age

59 1/2 years of age is when taxpayers may withdraw from both Traditional IRAs and Roth IRAs without penalty.

5. Spousal IRA

If your spouse is unemployed, and you file jointly, you can contribute to your spouse’s Traditional IRA or Roth IRA.

That said, the amount you contribute to both your own and your spouse’s IRA cannot exceed your earned income.

Roth vs. Traditional: Differences

The tricky thing about deciding whether to contribute to a Roth IRA or a Traditional IRA (or both) is that there are so many differences between the two accounts and therefore so many variables to consider.

1. When You Get the Tax Benefit

Both the Traditional IRA and the Roth IRA offer potential tax benefits, but the timing of these benefits differs between the two.

With a Traditional IRA, contributions you make are deductible in the year you make them insofar as you are eligible to take a Traditional IRA deduction (more on that later).  However, when you withdraw money from your Traditional IRA in retirement, the amount you withdraw is taxed as income.

With a Roth IRA, you don’t get a deduction for the amount you contribute in retirement, but the earnings grow tax-free, and any distributions you take in retirement are not included in your taxable income.

2. Income Limitations

Traditional IRAs and Roth IRAs both have income limitations, but their respective limitations limit different things.

The Roth IRA’s income limitations limit who may contribute (directly) to a Roth IRA, while the Traditional IRA’s income limitations limit who may take a deduction for their Traditional IRA contribution.  Anyone, no matter their income, may contribute to a Traditional IRA.

Here are the Traditional IRA income limitations on contribution deductibility:

Traditional IRA Contribution Deduction Limits
Filing Status
Full deduction with MAGI:
Partial deduction with MAGI:
No deduction with MAGI:
Married filing jointly and you're covered by retirement plan at work2019: $103,000 or less

2020: $104,000 or less
2019: between $103,001 and $122,999

2020: between $104,001 and $123,999
2019: $123,000 or more

2020: $124,000 or more
Married filing jointly and your spouse is covered by a retirement plan at work2019: $193,000 or less

2020: $196,000 or less
2019: between $193,001 and $202,999

2020: between $196,001 and $205,999
2019: $203,000 or more

2020: $206,000 or more
Single or head of household and you are covered by a retirement plan at work2019: $64,000 or less

2020: $65,000 or less
2019: between $64,999 and $73,999

2020: between $65,001 and $74,999
2019: $74,000 or more

2020: $75,000 or more
Married filing separately and you or your spouse is covered by a retirement plan at work2019: Full deduction not permitted.

2020: Full deduction not permitted.
2019: between $0 and $9,999

2020: between $0 and $9,999
2019: $10,000 or more

2020: $10,000 or more
 

And here are the Roth IRA income limitations on contributing directly to a Roth IRA.  Note that these rules can be worked around by using backdoor Roth IRA strategy.

Roth IRA Income Limits
Filing Status
Full contribution with MAGI:
Partial contribution with MAGI:
No contribution with MAGI:
Married filing jointly or qualifying widow(er)2019: less than $193,000

2020: less than $196,000
2019: between $193,000 and $202,999

2020: between $196,000 and $205,999
2019: $203,000 or more

2020: $206,000 or more
Single, head of household or married filling separately (if you did not live with spouse during year)2019: less than $122,000

2020: less than $124,000
2019: between $122,000 and $136,999

2020: between $124,000 and $138,999
2019: $137,000 or more

2020: $139,000 or more
Married filing separately (if you lived with spouse at any time during year)2019: Full contribution not permitted.

2020: Full contribution not permitted.
2019: less than $10,000

2020: less than $10,000
2019: $10,000 or more

2020: $10,000 or more
 

3. When You Get Your Tax Break

With a Traditional IRA, you get a tax break now insofar as you can deduct your contribution to your account.

With a Roth IRA, you get a tax break later when you withdraw money from your account in retirement tax-free.

4. Withdrawing Contributions

Roth IRA contributions can be withdrawn from the account without penalty even before age 59 1/2.

Earnings on these contributions, however, will be taxed.

Apart from very limited exceptions, Traditional IRA contributions cannot be withdrawn from the account before age 59 1/2 without triggering taxes and a penalty on the entire withdrawn amount.

5. Required Minimum Distributions

When you turn 72 years of age, the IRS requires you to start taking distributions from your Traditional IRA account.  These are known as required minimum distributions (RMDs).

Roth IRA accounts do not have RMDs.

Which Is Best For You?

Everyone’s situation is different, and only you can determine whether or not a Traditional IRA or a Roth IRA is right for you.

That said, here are some guidelines:

  • Generally speaking, the lower your current tax bracket and the further away you are from retirement, the more advantageous a Roth becomes.
  • If you’re planning to take some time off or otherwise foreseen a low-tax-bracket year in the near future, consider contributing to a Traditional IRA now and then converting to a Roth in a low-tax-bracket year.
  • Remember, you can contribute to both a Traditional IRA and a Roth IRA in the same year!
Logan Allec, CPA

Logan is a CPA, Certified Student Loan Professional, and founder of Money Done Right, which he launched in July 2017. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.

Back to top  

2 Comments

I felt like the best plan was to max out my 401k, my Roth and put another big chunk in a taxable brokerage account every year, except in those years I earned too much to have a Roth. So now, retired, I’ve got a good mix of Ira, Roth and taxable brokerage accounts.

Yes, I think that it’s wise to have a mix, given that early on it’s pretty much impossible to know what your tax rates will look like in retirement. Of course, with a crystal ball, one could contribute for maximum tax efficiency, but the thing about crystal balls is that they don’t exist. It’s pretty great that the SECURE Act bumped the RMD age to 72!

LEAVE A COMMENT

Your email address will not be published. Required fields are marked *