Unit
- Traditional IRA: Contributions are tax-deductible in the year made, reducing current taxable income. Withdrawals are fully taxable as ordinary income. This structure suits individuals who expect a lower tax rate in retirement.
- Roth IRA: Contributions are made with after-tax dollars and are not deductible. Qualified withdrawals, including earnings, are tax-free. Best for those who anticipate higher future tax rates or want tax diversification.
- Income eligibility: Roth IRA contributions phase out for high earners. In 2025, the phase-out range for single filers is $140,000 to $155,000, and for married filing jointly it is $218,000 to $228,000. Traditional IRA deductibility also has income limits if the contributor or spouse has a workplace retirement plan.
- Contribution limits: For 2025, the annual limit is $7,000 ($8,000 if age 50 or older) across all IRAs. Catch-up contributions allow those nearing retirement to save more. These limits are indexed for inflation.
- Required minimum distributions: Traditional IRAs mandate RMDs starting at age 73 (as of 2025 under the SECURE 2.0 Act). Roth IRAs have no RMDs during the original owner's lifetime, making them effective estate planning tools.
- Early withdrawal penalties: Withdrawals before age 59½ incur a 10% penalty on earnings, plus taxes for Traditional IRAs. Roth IRAs allow penalty-free withdrawal of contributions anytime; earnings may be subject to penalty if not meeting qualified distribution criteria (five-year rule and age 59½).
- Spousal IRAs: A non-working spouse can contribute to an IRA based on the working spouse's earned income, within the same limits. This helps married couples build retirement savings even if one partner stays at home.
- Tax planning use: Many advisors recommend holding a mix of Traditional and Roth IRAs to create tax flexibility in retirement. Withdrawals can be strategically taken to manage marginal tax brackets.
- Roth conversions: Traditional IRA assets can be converted to a Roth IRA by paying income tax on the converted amount in the year of conversion. This strategy can reduce future RMDs and provide tax-free growth, especially useful in lower-income years before RMDs begin.
- Beneficiary rules: IRA beneficiaries include spouses, non-spouse individuals, or trusts. Spouses can treat the inherited IRA as their own, deferring RMDs. Non-spouse beneficiaries must generally take RMDs over a 10-year period under the SECURE Act, with exceptions for eligible designated beneficiaries.
- Rollover options: Funds from employer plans like 401(k)s can be rolled into a Traditional IRA without tax consequences. Direct rollovers avoid withholding, while indirect rollovers must be completed within 60 days to avoid penalties and taxes. Roth 401(k) balances roll into a Roth IRA.
Regulatory Requirement
Regulation: IRS Code Sections 408 and 408A
Traditional and Roth IRAs are governed by IRS provisions that define contribution limits, income thresholds, and tax treatment. The SECURE 2.0 Act of 2022 introduced changes including increased RMD age and indexed catch-up limits. Financial professionals must adhere to these rules when advising clients or managing IRA operations.
Quick Revision
- Traditional IRA offers tax-deferred growth with deductible contributions; taxed upon withdrawal.
- Roth IRA provides tax-free growth with after-tax contributions; no RMDs for the owner.
- Contribution limits are unified across all IRAs; phase-outs apply for Roth and deductible Traditional IRAs.
- Early withdrawals generally subject to 10% penalty unless exceptions apply.