Roth IRA vs. Traditional IRA in Plain English

An IRA — short for Individual Retirement Account — is a special tax-advantaged account you can open on your own to save for retirement. The two most common flavors are the Roth IRA and the Traditional IRA. The big question is when you want the tax break: now or later.

This is a plain-English comparison, not personal advice. The IRS publishes the official current limits and rules at irs.gov/retirement-plans. For a feel for how investment growth compounds inside any of these accounts, see How Compound Interest Works and the investing basics overview.

The one-line difference

• Traditional IRA — You may deduct your contribution from this year's taxes, money grows tax-deferred, and you pay regular income tax when you withdraw it in retirement.
• Roth IRA — You contribute money you have already paid tax on, money grows tax-free, and qualified withdrawals in retirement come out tax-free.

Either way, your money grows inside the account without yearly tax bills on dividends or capital gains. The "Roth versus Traditional" question is mostly: do you want the tax break now (Traditional) or later (Roth)?

Who can contribute

The IRS sets two important things every year:

• Annual contribution limit. A combined cap across all your IRAs (Roth and Traditional together). For example, recent years have allowed roughly $7,000 for people under 50 and a higher catch-up amount for people 50 and older. Check IRS Retirement Plans for the current number.
• Income limit for the Roth. If you earn above a certain modified adjusted gross income, your Roth contribution shrinks and eventually goes to zero. The Traditional IRA does not have an income cap on contributions, but it does have one on the deduction if you (or a spouse) are also covered by a workplace plan.

You also need earned income — wages, salary, tips, self-employment income — at least equal to what you contribute. Investment income alone does not count.

How withdrawals work

This is where the two accounts really diverge. The IRS calls a withdrawal a distribution.

• Traditional IRA. You owe regular income tax on the full amount you take out. If you pull money before age 59½, you usually owe an extra 10% early-withdrawal penalty on top of the tax, with limited exceptions (first home, qualified education, certain medical bills).
• Roth IRA. You can pull out the money you contributed (your "basis") at any age without tax or penalty. The growth has its own rules: to take out earnings tax-free, you generally need to be at least 59½ and have had any Roth IRA open for at least five years.

The IRS calls a withdrawal you owe penalty on a "non-qualified distribution." Their plain-English page on IRA distributions is at irs.gov/retirement-plans.

Required Minimum Distributions

Once you reach a certain age (currently 73 for most savers, but the cutoff has been moving), the IRS makes you start withdrawing a minimum amount from a Traditional IRA every year. These are called Required Minimum Distributions (RMDs).

Roth IRAs do not require the original owner to take RMDs during their lifetime — a major reason some savers prefer the Roth side.

Where to open an IRA

You can open an IRA at most banks, credit unions, and brokerages. The Securities and Exchange Commission's beginner site Investor.gov walks through the difference between brokerage IRAs (where you pick stock and bond funds) and bank IRAs (where you usually pick CDs).

The National Credit Union Administration (NCUA) and the Federal Deposit Insurance Corporation (FDIC) insure cash deposits in IRAs at credit unions and banks up to the standard limits. They do not insure investments — for example, mutual funds and ETFs inside a brokerage IRA can rise or fall in value.

Roth versus Traditional: how people think about it

There is no universal "right" answer, but here are the questions people usually weigh:

• Where do you think your tax rate will be later? If you expect to be in a higher tax bracket in retirement, paying tax now (Roth) often looks attractive. If you expect to be in a lower bracket later, deducting now (Traditional) can come out ahead.
• Do you want flexibility before 59½? Roth contributions can be pulled back out without tax or penalty. Traditional withdrawals before 59½ usually trigger the 10% penalty.
• Are you at the income limit for Roth contributions? Some savers above the limit use a method called a "backdoor Roth" — talk to a qualified tax pro before you try it.
• Are you also using a workplace plan? A 401(k) or 403(b) match at work is usually the first place people put retirement dollars before deciding which IRA to use on the side.

For a calmer feel for how investment growth itself works regardless of the tax wrapper, see compound interest and interest rate in our glossary.

A note on rules and numbers

IRA rules and contribution limits change almost every year. The IRS, Investor.gov, FDIC, and NCUA are the official sources. If you are deciding which type to use — or how much to put in — talking with a qualified tax pro or a fee-only financial planner before you contribute can save real money down the road.

Numbers and rules in this article change every year — always check the latest from the IRS, CFPB, and your bank.