Roth IRA vs Traditional IRA: Which Should You Open First?

When you're starting to invest for retirement, the Roth IRA vs. traditional IRA question comes up almost immediately. Both let you invest money that grows tax-advantaged. They're structured differently, and for most people, one will work out better than the other depending on where their income and tax situation land.

The short version: a Roth IRA is funded with after-tax dollars and grows tax-free. A traditional IRA is funded with pre-tax dollars and gets taxed when you take money out in retirement. The question of which is better is essentially a question about tax rates: yours now versus your expected rate in retirement.

How a traditional IRA works

With a traditional IRA, you may be able to deduct your contributions from your taxable income in the year you make them. That reduces your tax bill today. The money grows tax-deferred. You don't pay taxes on gains until you withdraw the money in retirement.

When you retire and start taking distributions, those withdrawals are taxed as ordinary income. The IRS also requires you to start taking minimum distributions at age 73 (as of 2023 IRS guidance), whether you need the money or not.

The tax deduction on contributions phases out at higher incomes if you (or a spouse) have access to a workplace retirement plan like a 401(k). The IRS publishes updated phase-out ranges annually. Check them if your income is near the threshold.

How a Roth IRA works

A Roth IRA works in reverse. You contribute money you've already paid taxes on. There's no deduction. But the money grows completely tax-free, and qualified withdrawals in retirement are tax-free too. You won't owe taxes on decades of investment growth when you pull it out.

There's no required minimum distribution with a Roth IRA during your lifetime, which gives you more flexibility to leave money invested or pass it on.

Roth contributions also have income limits. For 2024, the ability to contribute phases out for single filers above roughly $146,000 in modified adjusted gross income (MAGI) and for married filers above roughly $230,000. If your income exceeds these thresholds, a "backdoor Roth" strategy may still be available, though that gets into territory worth discussing with a tax professional.

Annual contribution limits apply to both account types combined. For 2024, the IRS limit is $7,000 per year ($8,000 if you're 50 or older).

The core question: when will your tax rate be higher?

The answer to "Roth or traditional?" mostly depends on this: will your effective tax rate be higher now, or when you're in retirement?

If you expect to be in a lower tax bracket in retirement (because you'll have less income than during your working years), a traditional IRA can make sense. You defer taxes now at a higher rate and pay them later at a lower rate. That's a real benefit.

If you expect to be in a similar or higher bracket in retirement (a pension, other retirement income, or substantial savings can all push you there), paying taxes now with a Roth and never paying them again on that growth looks more attractive.

For younger workers who are early in their careers and expect their income to climb significantly, the Roth tends to win. For workers who are at or near peak earnings and expect to step down in retirement, traditional often makes more sense.

Nobody knows exactly what tax rates will look like in 20 or 30 years, and that uncertainty is part of why some advisors recommend splitting contributions between both account types when possible. That way you hedge your tax exposure either way.

Flexibility differences that matter

Beyond the tax timing, there are practical differences worth knowing:

With a Roth IRA, you can withdraw your contributions (not earnings) at any time, for any reason, without tax or penalty. Your contributions are always accessible. This makes a Roth slightly more flexible as a savings vehicle if you might need the money before retirement, though pulling from retirement accounts early generally undermines the long-term goal.

With a traditional IRA, early withdrawals before age 59½ typically trigger a 10% penalty plus income taxes, with limited exceptions (first home purchase, disability, certain medical expenses).

What if you have a 401(k) at work?

An IRA is separate from a workplace 401(k), and you can contribute to both in the same year. If your employer offers a 401(k) match, capturing that match first is generally the priority before funding an IRA. For guidance on how much you should have saved at each stage of your career, see our guide on how much to have in your 401(k) by age. It's effectively a 50% or 100% return on that contribution before any investment growth.

After capturing the match, many people fund a Roth IRA next (particularly if the 401(k) is traditional), then return to the 401(k) for additional contributions. That layering approach spreads tax exposure across different account types.

If you're just getting started with investing and want to understand the basics before opening any account, the guide to starting investing with $100 covers the fundamental concepts without assuming prior knowledge.

A quick comparison

Your next step

Both a Roth IRA and a traditional IRA are available through most online brokerages. You don't need a lot of money to open one. Many platforms allow you to start with no minimum and buy fractional shares of index funds.

The most important step is opening an account and contributing consistently, even if the Roth vs. traditional question isn't perfectly resolved. The cost of waiting while you optimize the choice is usually higher than the cost of choosing slightly wrong. If you're unsure which fits your tax situation, a fee-only financial advisor or a CPA can give you a clear answer based on your actual numbers. This article is general education, not a recommendation for your specific situation.

This article was generated with the assistance of AI and reviewed for accuracy. It is for general educational purposes only and is not financial, tax, or legal advice.