Roth vs. Traditional IRA: Choosing the Right Path for Your Retirement Savings

Saving for retirement is one of the most important financial decisions you'll make. Individual Retirement Accounts (IRAs) play a crucial role in securing your future. Among the most popular options, Roth IRAs and Traditional IRAs offer distinct advantages, yet their differences can be confusing.

How do you know if a Roth vs. traditional IRA is right for you? This guide will break down the key features, tax benefits and scenarios for using each IRA type, so you can make an informed choice about your retirement savings.

What Are IRAs, and Why Are They Important?

IRAs are tax-advantaged accounts designed to help individuals save for retirement. Unlike regular savings or brokerage accounts, IRAs provide unique tax benefits, encouraging long-term investment growth. They are particularly valuable for building a retirement nest egg, as they allow your money to grow either tax-deferred or tax-free, depending on the type of account.

There are different kinds of IRAs, but Roth IRA and Traditional IRA are the most popular. Both have specific rules and benefits that make them suitable for various financial situations and goals.

Understanding Traditional IRAs

If you’re looking for a way to reduce your taxable income now, a Traditional IRA could be appealing. Here’s how it works:

How Contributions Work
Traditional IRAs let you contribute pretax dollars—reducing your taxable income today. The 2025 contribution limit is $7,000 for those under 50, with a $1,000 catch-up (total $8,000) for those aged 50 or above—shared across both traditional and Roth IRAs.

Deduction Eligibility
Your ability to deduct contributions depends on your Modified Adjusted Gross Income (MAGI) and whether you’re covered by a workplace retirement plan:

• Single filers covered at work: full deduction up to $79,000; partial between $79,000–$89,000; none above.
• Married filing jointly: full if ≤ $126,000; phased out between $126,000-$146,000; no deduction above.

Withdrawal Rules
Withdrawals are taxed as ordinary income. Early withdrawals (before age 59½) may incur a 10% penalty unless exceptions apply. Required Minimum Distributions (RMDs) begin at age 73.

Understanding Roth IRAs

A Roth IRA is an individual retirement account that allows contributions with after-tax dollars. This means you don’t get a tax deduction upfront for your contributions. However, your investments grow tax-free, and withdrawals in retirement are also tax-free, as long as you meet certain conditions. 

2025 Contribution & Income Limits
The Roth contribution limit mirrors Traditional IRAs for 2025: $7,000, or $8,000 if age 50+.

Roth IRA Income Limits (2025):

• Single filers: full contribution if MAGI ≤ $150,000; partial up to $165,000; none above.
• Married filing jointly: full if MAGI ≤ $236,000; partial up to $246,000; none above.
  
  

Withdrawal Rules
You can withdraw contributions at any time, tax- and penalty-free. Earnings are also tax-free if you're at least 59½ and meet the five-year rule. Roth IRAs don’t impose RMDs during the original owner’s lifetime.

Roth vs. Traditional IRA: Taxes Explained

One of the primary deciding factors in the Roth vs. traditional IRA debate is how and when you pay taxes.

• Traditional IRA: Deduct now, pay taxes later. Contributions reduce annual gross income (AGI), potentially lowering your tax bracket today.
• Roth IRA: Tax now, tax-free later. No reduction to current taxable income, but future withdrawals are tax-free.
  

Your choice depends on your expectations for future tax rates, your current vs. future income and whether you want to diversify your tax exposure.

Pro Tip: Use a Roth IRA calculator to estimate how each option affects your savings and tax outcomes over time.

Pros and Cons of Each IRA Type

Tax treatment is the main distinguishing factor between Roth and Traditional IRAs. When comparing Roth vs. Traditional IRA pros and cons, it helps to see them side by side:

Exceptions to Early Withdrawal Penalties 

IRAs are designed to help you save for retirement, but life can be unpredictable. If you need to access your funds before age 59½, early withdrawals typically incur a 10% penalty on top of regular income taxes. However, there are specific situations where this penalty is waived:

• First-Time Home Purchase: Withdraw up to $10,000 penalty-free for a first-time home purchase. This applies to you, your spouse, children or grandchildren.
• Qualified Education Expenses: Use IRA funds penalty-free for tuition, fees, books and supplies required for enrollment at an eligible educational institution.
• Unreimbursed Medical Expenses: Withdrawals can cover medical costs exceeding 7.5% of your adjusted gross income (AGI) without penalties.
• Disability: If you become permanently disabled, you can access your IRA funds penalty-free with proper documentation.
• Health Insurance Premiums for the Unemployed: If you’ve received unemployment compensation for at least 12 consecutive weeks, you may use IRA funds to pay health insurance premiums without penalties.
• Birth or Adoption Expenses: Withdraw up to $5,000 penalty-free for costs related to the birth or adoption of a child within one year of the event.
• Other Exceptions: Additional exemptions include distributions for military reservists called to active duty, disaster-related expenses and IRS levies.

For a complete list of early withdrawal exemptions and eligibility requirements, visit the IRS website.

Which IRA Is Right for You? 

Your choice between a Roth and Traditional IRA depends on your current financial circumstances, income level and expectations for the future. Here are a few common scenarios:

Scenario 1: You’re Early in Your Career
If you’re currently in a lower tax bracket but expect your income to rise throughout your career, a Roth IRA may be the better choice. With a Roth IRA, you pay taxes on the contributions upfront, locking in today’s lower tax rate while enjoying tax-free growth and withdrawals down the road. 

Scenario 2: You’re Nearing Retirement
For those closer to retirement in a higher earning stage, a Traditional IRA can provide immediate tax savings. The current deduction helps reduce your taxable income, and withdrawals in retirement may face a lower tax rate if your income decreases. 

Scenario 3: You Value Flexibility 
If you’re unsure about when you’ll need access to your funds or want the option to leave your investments untouched for as long as possible, a Roth IRA offers greater flexibility. The absence of RMDs means your money can continue growing even into retirement without forced withdrawals.

Scenario 4: You Exceed Roth IRA Income Limits
High-income earners who cannot contribute directly to a Roth IRA may consider contributing to a Traditional IRA. Later, you can convert it to a Roth IRA through a strategy known as a backdoor Roth conversion. Consulting a tax advisor is recommended to ensure this approach aligns with your tax situation.

Which One Should You Choose? 

Deciding between a Roth vs. Traditional IRA requires evaluating your current income, tax rate and long-term financial goals. Start by considering these questions:

Pro Tip: Still unsure which IRA is right for you? Don’t worry—you can open both a Roth and a Traditional IRA. This strategy lets you enjoy immediate tax deductions from your Traditional IRA contributions while benefiting from tax-free withdrawals in retirement with your Roth IRA funds. Just remember to track your contributions carefully to stay within the shared contribution limits. 

Prepare for Retirement with the Right IRA Strategy

Both the Roth IRA and Traditional IRA offer valuable tax advantages that can help you achieve your retirement savings goals. While the right choice depends on your specific financial situation, understanding the features and benefits of each type of account brings you one step closer to a secure financial future.

For personalized guidance tailored to your unique needs, contact an LTax tax advisor. Our experts are ready to help you evaluate your options and develop a retirement strategy that aligns with your goals.

By making an informed decision today, you’ll better prepare yourself for the retirement you’ve always wanted.

LEGAL OR TAX: The information herein is not legal, such as trust or estate planning, advice, or tax advice. Any such information is provided for illustrative purposes only and must not be relied upon without the benefit of the advice of your lawyer and/or tax professional. Lido specifically disclaims any liability from any reliance on such information. Lido is not a legal service provider or tax professional and does not offer legal or tax advice. Should you desire to obtain tax or legal services or advice, you must enter into your own, ​independent engagement agreement with a licensed attorney or tax professional.