Roth & Traditional IRA's -Individual retirement arrangements (IRAs) are tax-favored savings vehicles designed to help individuals save for retirement. The two primary types are traditional IRAs and Roth IRAs, each with distinct rules regarding contributions, deductions, and distributions. A traditional IRA allows for potential tax-deductible contributions, and earnings grow tax-deferred until withdrawal. In contrast, Roth IRA contributions are made with after-tax dollars, meaning qualified distributions (including earnings) are tax-free, and there is no required minimum distribution (RMD) during the account owner’s lifetime.
Key Differences Between Traditional and Roth IRAs
- Contributions and Deductions: Contributions to a traditional IRA may be tax-deductible, depending on income, filing status, and whether the individual is covered by a workplace retirement plan. Roth IRA contributions are never deductible.
- Tax Treatment of Withdrawals: Traditional IRA withdrawals are taxed as ordinary income. Roth IRA qualified distributions are tax-free.
- Age Limits: For tax years after 2019, there is no age limit for contributing to either a traditional or Roth IRA, as long as the individual has earned income.
- Contribution Limits: For 2025, the annual contribution limit is $7,000 ($8,000 if age 50 or older) for both types. However, Roth IRA contributions may be phased out or eliminated based on income and filing status.
- Required Minimum Distributions (RMDs): Traditional IRAs require RMDs starting at age 73 (for current applicable cohorts under SECURE 2.0 transition rules). Roth IRAs do not require RMDs during the owner’s lifetime.
Employer-Sponsored IRAs
- SEP IRAs: Employers can contribute to SEP IRAs, which are tax-deferred retirement plans funded by employers. SEP IRAs are traditional IRAs only, and there is no Roth SEP IRA under current federal tax law.
- SIMPLE IRAs: Employers and employees may contribute to SIMPLE IRAs. These are generally traditional IRAs by default, but employers may offer a Roth SIMPLE IRA option if the plan has adopted it under SECURE 2.0 rules. Individuals cannot make regular standalone contributions outside the plan rules. These accounts have restrictions during the first two years of participation.
Source:
Form 8606 - Nondeductible IRAs
Publication 590-A - Contributions and Conversions
Publication 590-B - Distributions from IRAs
Publication 17 - Your Federal Income Tax
Disclaimer: Always verify details with the most current IRS forms, instructions, and publications. Tax laws and regulations may change annually. For complex situations, consult a qualified tax professional or attorney.