8 FAQs on Roth vs. traditional IRAs

By Amy Fontinelle
Amy Fontinelle is a personal finance writer focusing on budgeting, credit cards, mortgages, real estate, investing, and other topics.
Posted on Mar 12, 2018

Both Roth IRAs and traditional IRAs can help you save for retirement. But they have different rules about taxes on contributions and withdrawals, what happens if you need to take money out before retirement, and other things that can affect which account type you might be better off contributing to. We’ve answered some of the top frequently asked questions about the differences between these two savings vehicles to help you decide.

Is there a difference in how much I can contribute to a Roth vs. a traditional IRA?

In 2018, you can contribute up to $5,500 to an IRA. If you have two IRAs (both a traditional and a Roth, for instance), you cannot contribute $5,500 to each. You can contribute $0 to one and $5,500 to the other, $2,750 to one and $2,750 to the other, or divide your contributions between the two any other way you choose. The total contribution cannot be more than $5,500, though.

There are two exceptions to the $5,500 cap:

  • You’re 50 years old or older. In that case, your total contributions cannot be more than $6,500. The extra $1,000 is called a catch-up contribution. (Related: Retirement plan contribution limits: Your need-to-know)
  • Your taxable compensation for the year was less than $5,500. You cannot contribute more than you earned. If your taxable compensation was $4,000, the most you can put in your IRA is $4,000.

Can I contribute to an IRA no matter how much I earn?

No, at least for Roth IRAs. For married couples filing jointly, the ability to contribute to a Roth IRA phases out when modified adjusted gross income (MAGI) reaches $189,000 and is eliminated at $199,000. For taxpayers who are single or married filing separately and living apart, the ability to contribute phases out when MAGI reaches $120,000 and is eliminated at $135,000. For taxpayers who are married filing separately but who have lived together at any point during the year, the ability to contribute is eliminated once MAGI reaches just $10,000.

Calculate MAGI by adding to adjusted gross income any deductions for traditional IRA contributions, student loan interest, tuition and fees, and certain other, less-common above-the-line deductions (like the foreign earned income exclusion and the foreign housing exclusion that some expatriates take). (Learn more: Setting financial goals: Retirement)

If you have a traditional IRA, you can contribute no matter how much you earn, but you may not be able to take a tax deduction for your contribution. If you or your spouse are covered by a workplace retirement plan and your income exceeds $73,000 for single taxpayers or $121,000 for married taxpayers filing jointly, you will not be able to claim a deduction. You can still make after-tax contributions, however.

How are my contributions and withdrawals taxed on each type of IRA?

With a traditional IRA, you do not pay tax on the money you contribute (in other words, contributions are made with pretax dollars), but you do pay tax on the money you withdraw. With a Roth IRA, you do pay tax on the money before you contribute (after-tax dollars), but you do not pay tax on the money you withdraw. In both types of IRA, your earnings and gains aren’t taxed while they remain in the account.

You know how you get a form from your bank each year showing how much interest you earned because you have to provide that information with your tax return and pay tax on your interest? That doesn’t happen with an IRA — which helps your money grow faster.

Here’s a simplified example to illustrate the difference between the two IRA types.

Traditional IRA: You contribute $5,000 of pretax money to a traditional IRA in 2018. When you retire in 2032, your money has grown hypothetically to $10,000. Your marginal tax rate is 22 percent. You withdraw all $10,000 and pay a 22 percent tax on it, or $2,200, leaving you with $7,800. But you saved 22 percent of $5,000, or $1,100, when you made your contribution, because your contribution was not taxable. So you really ended up with $8,900 or more, depending on how you used the $1,100 in up-front tax savings.

Roth IRA: You contribute $5,000 of after-tax money to a Roth IRA in 2018. Since you are in the 22 percent tax bracket, you had to earn about $6,400 to contribute that $5,000 in the first place. When you retire in 2032, your money has hypothetically grown to $10,000, but at the sacrifice of the $1,400 in up-front taxes you paid, so it’s like you’re only making out with $8,600. However, you get to withdraw all $10,000 tax free.

Either way, you pay taxes; it’s just a matter of when. And while this example might make it seem like you’ll come out ahead contributing to a traditional IRA, that’s not always the case. It all depends on your marginal tax rate at the time you contribute and at the time you take withdrawals, which, unfortunately, most people do not know with certainty ahead of time. And, of course, rates of return in various types of IRAs will vary as well.

In this example, we assumed the same 22 percent tax rate both when you contributed and when you withdrew, but in reality, your tax rates will probably be different. Because you can’t know these things ahead of time, it may be strategic to contribute to both types of accounts.

So I do not have to choose between a Roth IRA and a traditional IRA — can I have both?

Yes, and in fact, retirement planning experts recommend having a combination of post-tax and pretax accounts to draw upon in retirement. This might mean having both a Roth IRA and a 401(k) or both a Roth IRA and a traditional IRA. Since you do not know what your income or tax bracket will look like during any given year of your retirement, having the option to withdraw money from a Roth tax free in years when your income is higher and to withdraw taxable funds from a traditional IRA in years when your income is lower can keep your tax bill down.

“Having two buckets of money with different tax consequences gives you more control, and you can decide when it is more advantageous to take one or the other,” said CFP® Patricia Stallworth, an Atlanta-based money coach and the host of the "Minding Your Money 360°" podcast.

Should you always contribute to both types of accounts every year?

Not necessarily. The conventional wisdom says that if you’re in a lower tax bracket when you make contributions than when you take withdrawals, you’ll come out ahead with a Roth. If you’re in a higher tax bracket when you make contributions than when you take withdrawals, you’ll come out ahead with a traditional IRA.

David Walters, a CFP®, CPA, and portfolio and client services manager with Palisades Hudson Financial Group in Portland, Oregon, said in an interview that “another reason you might have both accounts is if you want to make a backdoor Roth IRA contribution in order to avoid the Roth IRA annual income contribution limit. Under this strategy, for taxpayers who are not allowed to make a Roth IRA contribution because they are over the annual income limit, they can make a nondeductible traditional IRA contribution and, shortly thereafter, initiate a tax-free rollover of their traditional IRA to their Roth IRA.”

My spouse is taking a few years out of the workforce to raise our young children. Can I contribute to an IRA on my spouse’s behalf?

Yes, but you must file jointly and your MAGI must be less than $199,000. Your total contributions cannot exceed your total compensation. So if you only make $9,000 for the year, you cannot contribute $5,500 to your IRA and $5,500 to your spouse’s IRA, which would total $11,000. You’d have to reduce your contributions to either or both of your IRAs to total $9,000 or less.

Note that someone else could contribute to your IRA on your behalf, as long as their contribution (plus your contribution, if any) does not exceed your annual taxable income.

Also, let’s say your 16-year-old son earned $3,000 from a part-time job and you wanted to give him a huge jump start on saving for retirement. You could open an IRA for him and contribute $3,000. Just be aware that your generosity might have implications for college financial aid.

When do I get to take the money out?

Normally, when you’re 59½, you can withdraw both earnings and contributions from either type of IRA without paying any penalties. Roth IRAs do have a rule preventing the earnings portion of the account from being tapped for five years from when you established the account. Once you reach age 70½, if you have a traditional IRA, you’re required to withdraw a certain amount from it each year, called a required minimum distribution (RMD). If you do not withdraw your RMD, you may have to pay a hefty 50 percent excise tax on the amount you were required to withdraw. With a Roth IRA, you are not required to take distributions from it. You can pass the entire account on to your heirs and let them worry about RMDs. 

Career coach Larry Boyer of Success Rockets LLC recommends having a Roth IRA because it allows you to withdraw your contributions at any time. He said in an interview that older workers are increasingly finding themselves unemployed and unemployable because of artificial intelligence and other technological advantages. They’re not able to choose their retirement age, making a Roth IRA a lifeline for anyone forced to retire early.

If you’re at least 55 when this separation from service happens, though, under IRS rule 72(t) you may be allowed to begin taking distributions from your traditional IRA or 401(k) early without penalty.

I’m afraid I might need the money for something else. Should I still contribute?

Yes, for several reasons. In a best-case scenario, you won’t need the money for something else and you’ll have made extra contributions to your retirement account that can grow for years. The more you contribute and the younger you are when you contribute, the faster your money will grow from investment returns and the less principal you’ll have to contribute over your lifetime to end up with a nice nest egg. (Related: Saving for retirement in your 20s: Doing the math)

“You should not contribute to an IRA if you don't have some sort of emergency fund in place,” said Mike Zeiter, CPA and personal financial specialist with Foundations Financial Planning LLC, in an interview. His general guideline is to establish an emergency fund, contribute to employer plans to receive any matching contribution available, then make IRA contributions.

There is no sense in putting money in a retirement account if you can't afford to pay the bills in an emergency, Zeiter explained, because you will just end up withdrawing the money and paying a penalty.

There’s one big exception: As Boyer mentioned, as long as it has been at least 5 years from when you first established and contributed to a Roth IRA, a Roth IRA allows you to withdraw your contributions (but not your earnings) without paying taxes or penalties.

With a traditional IRA, you can remove money early in exchange for paying a 10 percent penalty on the amount you withdraw. You’ll also pay income tax on your withdrawals, just like you would in retirement. IRAs do not allow loans, but if you have a 401(k), you could consider borrowing from that account. With traditional IRAs, one exception to the 10 percent penalty is the ability take up to a $10,000 distribution as a first-time homebuyer. You’ll have to pay income tax on that withdrawal, however, which will reduce the amount you can actually put toward your down payment.

Related: Borrowing from your 401(k): The risks

Zeiter suggested saving for retirement at the same time as saving for a down payment. “You could put 3 percent of your income into retirement instead of 6 percent, but you shouldn't completely stop saving for retirement while trying to save for a down payment,” he said. “Life changes too much. You may end up putting off buying a house for five years. The one thing about saving for retirement is that you can only contribute a certain amount every year, and the law never lets you go back.”

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The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own, and do not necessarily represent the views of Massachusetts Mutual Life Insurance Company.