Traditional IRA vs. Roth IRA: Key Differences

Both account types share one combined annual contribution limit. For 2026 the limit is $7,500 if you are under age 50, or $8,600 if you are age 50 or older by the end of the year (the extra $1,100 is the catch-up contribution). You cannot contribute $7,500 to a Traditional IRA and another $7,500 to a Roth IRA — the limit applies to the combined total across all your IRAs of both types.

Your contribution also cannot exceed your earned compensation for the year (wages, salaries, self-employment income, and similar). Passive income such as dividends, interest, and rental income does not count as earned compensation for IRA contribution purposes.

Traditional IRA withdrawals are taxed as ordinary income in the year you receive them — both the original contributions (to the extent they were deducted) and all the accumulated growth. If you made nondeductible contributions, those come back tax-free, which is why Form 8606 tracking matters.

Qualified Roth IRA withdrawals are entirely tax-free, including the growth. Withdrawing Roth contributions (not earnings) is always tax- and penalty-free because you already paid tax on them. Early withdrawals of Roth earnings may be subject to income tax and a 10% early-distribution penalty if the account is not yet five years old or you are under 59½.

When the same dollar amount is contributed to each account type, the Roth tends to produce a higher after-tax result if your tax rate in retirement is higher than your current rate. The Traditional tends to produce a higher result if your future tax rate is lower. When rates are identical, the two are mathematically equivalent — and the choice becomes about other factors such as RMD flexibility, estate planning, or hedging against tax-rate uncertainty.

A common comparison mistake is using different after-tax dollar amounts. Contributing $7,500 to a Roth costs you $7,500 of take-home pay. Contributing $7,500 to a deductible Traditional IRA costs less after the deduction — the difference is the tax savings. Investing those tax savings alongside the Traditional IRA can change the outcome significantly.

Traditional IRAs are generally subject to required minimum distributions beginning at age 73 under current federal law. RMDs are calculated each year based on your account balance and an IRS life-expectancy factor. Failing to take the required amount triggers a significant penalty. RMDs increase your taxable income in the years they are taken, which can affect bracket positioning, Medicare premium surcharges, and the taxation of Social Security benefits.

Roth IRAs do not require the original owner to take distributions during their lifetime. Inherited Roth IRAs are generally subject to distribution rules for beneficiaries, which differ from original-owner rules.

When a Traditional IRA contribution is not deductible, it creates IRA basis — the portion of your Traditional IRA balance that has already been taxed. Without tracking basis, you could pay tax twice on the same dollars when you withdraw. IRS Form 8606 is the mechanism for reporting and tracking nondeductible contributions. You file it in any year you make a nondeductible contribution and in any year you take a distribution when you have existing basis.

The pro-rata rule applies when you have both pre-tax and after-tax amounts across all your Traditional, SEP, and SIMPLE IRA accounts. Distributions are treated as coming proportionally from pre-tax and after-tax amounts; you cannot choose to withdraw only the after-tax portion first.

You can convert Traditional IRA money to a Roth IRA at any time. The converted amount is generally included in your taxable income in the year of conversion (except for any basis already tracked on Form 8606). Roth conversions do not count against the annual contribution limit — they are a separate transaction. A Roth conversion can make sense when your current tax rate is temporarily lower, but it requires paying tax now in exchange for tax-free growth and withdrawals later.

Enter your age, income, filing status, and contribution amount to compare estimated after-tax values for Traditional and Roth IRA strategies under your assumptions.