IRA Basics
An Individual Retirement Account (IRA) is a tax-advantaged account for retirement savings. In 2025, you can contribute up to $7,000/year ($8,000 if you're 50 or older). Both account types hold the same investments — stocks, bonds, ETFs — but differ in when you get the tax benefit.
The Roth IRA
You contribute after-tax dollars. Your money grows tax-free, and qualified withdrawals in retirement are completely tax-free — including all the gains.
Income limits apply. In 2025, single filers above $161,000 and joint filers above $240,000 cannot contribute directly. A "backdoor Roth" conversion is available for higher earners.
- Tax-free growth and withdrawals in retirement
- No required minimum distributions during your lifetime
- Contributions (not earnings) can be withdrawn any time penalty-free
- Best if you expect a higher tax rate in retirement than today
The Traditional IRA
Contributions may be tax-deductible now, reducing your current taxable income. But withdrawals in retirement are taxed as ordinary income.
Deductibility phases out at certain income levels if you or your spouse also have a workplace retirement plan.
- Potential upfront tax deduction
- Required minimum distributions starting at age 73
- 10% early withdrawal penalty before age 59½ (with exceptions)
- Best if you expect a lower tax rate in retirement than today
Key insight: Roth vs. Traditional is ultimately a bet on your future tax rate. If you're young and early-career, your income will likely be higher later — Roth usually wins in that scenario.
Side-by-Side
- Tax treatment: Roth = pay now, grow tax-free. Traditional = deduct now, pay later.
- Income limits: Roth has contribution limits. Traditional deductibility has limits if you have a workplace plan.
- RMDs: Traditional requires them at 73. Roth does not.
- Early access: Roth contributions accessible anytime. Traditional carries penalties before 59½.
How to Decide
- Under 40, early career? → Roth almost always wins
- High income now, expecting lower in retirement? → Traditional may be better
- Unsure? → Split contributions for tax diversification
Most important rule: Don't let the decision paralyze you. Either account, invested consistently, is infinitely better than waiting for certainty.