IRA Basics: Traditional vs Roth IRA Explained in Plain Language

An individual retirement account, or IRA, is one of the most flexible tools for retirement saving. You can open one on your own, whether or not you have a retirement plan at work. This guide explains what an IRA is, how traditional and Roth versions differ, why income rules matter, and how an IRA can fit alongside a workplace plan.

What an IRA is

An IRA is a retirement account you open yourself at a bank, brokerage, or other financial institution. Unlike a 401(k), it is not tied to your job, so it stays with you no matter where you work.

A few basics to know:

• You need earned income to contribute. Earned income generally means wages, salary, or self-employment income. There is an exception that may let a working spouse contribute on behalf of a non-working spouse.
• There is an annual limit. The IRS sets a yearly contribution limit, with an extra catch-up amount for people 50 and older. Check IRS.gov for this year’s figures.
• You choose the investments. An IRA is a container. Inside it, you choose what to hold, such as funds, bonds, or cash.
• There are deadlines. You can generally contribute for a given tax year up until the tax filing deadline the following spring.

Traditional IRA: a tax break now

With a traditional IRA, your contributions may be tax-deductible in the year you make them. That lowers your taxable income today.

How it works:

1. You contribute money, and you may be able to deduct it on your tax return.
2. The money grows tax-deferred, meaning you do not pay taxes on growth each year.
3. When you withdraw in retirement, withdrawals are generally taxed as ordinary income.
4. Starting at a certain age, you must begin taking required minimum distributions, or RMDs, which are minimum yearly withdrawals the IRS requires.

Withdrawals before age 59½ are generally taxed and may include a penalty, with some exceptions.

Roth IRA: tax-free withdrawals later

With a Roth IRA, you contribute money you have already paid taxes on. There is no deduction now, but the benefit comes later.

How it works:

1. You contribute after-tax money.
2. The money grows, and qualified withdrawals in retirement are generally tax-free, including the growth.
3. Roth IRAs do not require minimum distributions during the original owner’s lifetime.
4. You can generally withdraw your own contributions (not the growth) at any time without tax or penalty, though doing so reduces your retirement savings.

To be a qualified withdrawal, you generally must be at least 59½ and have had a Roth IRA for at least five years.

Side-by-side differences

	Traditional IRA	Roth IRA
Tax break	Possibly now (deduction)	Later (tax-free qualified withdrawals)
Withdrawals in retirement	Generally taxed	Generally tax-free if qualified
Required minimum distributions	Yes, starting at a set age	No, for the original owner
Income rules	Affect the deduction	Affect eligibility to contribute

A worked example

Say you contribute $3,000 to an IRA this year, and assume a hypothetical 22% tax rate today.

• Traditional: If your contribution is fully deductible, you could lower this year’s tax bill by about $660. Later, you pay income tax on what you withdraw.
• Roth: You get no tax break this year. But if that $3,000 grows to $15,000 by retirement, assuming a hypothetical 6% average annual return over about 28 years, qualified withdrawals of the full $15,000 would generally be tax-free.

Which is better depends mostly on whether you expect your tax rate to be higher now or later. Since nobody knows future tax rates for certain, some people hold both types of accounts. That way, in retirement, they can choose each year whether to draw from taxable or tax-free money, which gives them more flexibility to manage their tax bill. Early-career savers who expect their income to rise often lean toward Roth. People in their peak earning years sometimes prefer the deduction a traditional IRA can offer.

Income rules exist, so check before you contribute

Both types of IRAs come with income-based rules, and they work differently:

• Roth IRA: Your ability to contribute phases out above certain income levels. Above the top of that range, you cannot contribute directly.
• Traditional IRA: Anyone with earned income can contribute, but whether you can deduct it depends on your income and on whether you or your spouse is covered by a workplace retirement plan.

These income ranges are adjusted periodically and depend on your tax filing status. Check IRS.gov for this year’s figures before you contribute, and consider talking with a tax professional if your income is near a limit.

Using an IRA alongside a workplace plan

Many people use an IRA in addition to a 401(k) or similar plan. A common order of priorities looks like this:

1. Contribute enough to your workplace plan to get any employer match. That is extra money added to your savings.
2. Consider an IRA next. An IRA often offers a wider range of investment choices and can add tax diversity, especially if your workplace plan offers only traditional contributions.
3. Return to your workplace plan. If you still have room in your budget, increase your workplace contributions.

An IRA is also useful when you change jobs. You can often roll an old 401(k) into an IRA, which keeps your savings in one place and preserves the tax advantages. A direct rollover, where the money moves straight from one account to another, helps you avoid accidental taxes. If you receive a check instead, the IRS generally gives you a limited window to deposit it into the new account, so ask your plan administrator about a direct transfer before you start.

Your next small step

This week, check whether your income falls within the current Roth IRA limits on IRS.gov, and decide which type of IRA fits your situation best. Then use the Retirement Savings Estimator to see how adding a monthly IRA contribution, even $100, could affect your retirement picture.