Roth IRA vs traditional IRA

Roth vs traditional IRA: deductibility, income limits, the five-year rule, and a worked example at equal and different tax rates. Limits from the IRS.

Part of the Investment Accounts and Tax track on Agenticks. About 11 minutes, written for a beginner reader.

Read first: Tax-advantaged accounts explained, The 401(k) explained.

Last reviewed 2026-11-08.

Risk notice. Tax rules depend on where you live and on your own circumstances, and they change. This lesson explains how the rules work in general; the official source linked below is the final word.

Key takeaways

• A traditional IRA may give a deduction now, and deductible contributions and earnings are taxed when withdrawn. A Roth IRA gives no deduction, and qualified distributions are tax-free.
• One yearly limit covers all your traditional and Roth IRAs combined, and it cannot be more than your taxable compensation.
• Income limits decide whether you can contribute to a Roth IRA directly, and whether a traditional IRA contribution is deductible if you or your spouse has a workplace plan.
• A Roth distribution is qualified only after a five-year period and when you are 59½ or meet another condition. Regular contributions are treated as coming out first.
• With equal tax rates now and later, the two leave the same after-tax amount. They diverge when the rates differ.

This lesson applies to the United States. Individual retirement arrangements, or IRAs, are defined in US tax law and the rules below are the IRS's. Your income, filing status and workplace plan all change how they apply, and the figures are updated every year. An IRA is a retirement account you open yourself rather than through an employer. There are two main kinds. With a traditional IRA, you can deduct your contributions if you qualify, and deductible contributions and earnings are taxable when they come out. With a Roth IRA, contributions are not deductible, and there is no tax on a qualified distribution. They are the tax-deferred and tax-free designs from tax-advantaged accounts explained, side by side.

One limit across every IRA you own

The total you put into all of your traditional and Roth IRAs in a year cannot be more than the IRS dollar limit, or your taxable compensation for the year if that is less. People aged 50 and over can add a catch-up amount. The figures are in the table below.

The contribution limit. The IRS limit applies to everything you contribute to traditional and Roth IRAs combined, capped at your taxable compensation if that is lower. Income limits for a Roth IRA. How much you can put into a Roth IRA phases out as your modified adjusted gross income rises. Below the range you can contribute the full amount, within it a reduced amount, and above it nothing. The ranges depend on filing status and are in the table below. Deduction limits for a traditional IRA. Anyone with taxable compensation can contribute to a traditional IRA, but whether the contribution is deductible depends on income if you, or your spouse, are covered by a retirement plan at work. Those phase-out ranges are also in the table. A traditional IRA contribution that is not deductible is still allowed; it simply goes in with no deduction.

Individual retirement arrangement (IRA): traditional and Roth

Worked example: $5,000 of pre-tax income, 25 years

Someone has $5,000 of pre-tax income to save and a 25% tax rate now. Illustrative figures: a steady 6% a year for 25 years, so every dollar grows to about $4.29.

Illustrative numbers, not a forecast. Assumes the traditional contribution is fully deductible and the tax saved is invested too. Real returns vary and can be negative.

The example assumes the Roth withdrawal is qualified. In general terms, a Roth IRA distribution is qualified if it is made after the five-year period beginning with the first tax year for which a contribution was made to a Roth IRA set up for you, and it is made on or after the date you reach 59½, or because you are disabled, or to a beneficiary after your death, or for a first home purchase up to a lifetime limit. There is an ordering rule that softens this. When money comes out of a Roth IRA, your regular contributions are treated as coming out first, before conversions and earnings. Because those contributions were already taxed, taking them out is generally not taxed. It is the earnings that need a qualified distribution to come out tax-free. The full rules, including conversions, are in IRS Publication 590-B. Early withdrawals. Most retirement plan distributions are subject to income tax and may be subject to an additional 10% tax if taken early, with a list of exceptions. Roth IRAs also have no requirement to start taking distributions while the owner is alive.

Traditional IRA

Contributions may be deductible, Deductible contributions and earnings are taxed on withdrawal

Roth IRA

Qualified distributions are tax-free, Whether you can contribute depends on income

Both

Shares one yearly limit with your other IRAs

Find your own growth factor

Apply a tax rate at the start (Roth) or at the end (traditional) of the balance this shows. When the two rates match, the answer is the same either way. The default assumes 6% a year, an assumption for illustration and not a prediction.

Uncertainty is the real variable

The comparison turns on a tax rate decades away that nobody knows. Some people hold both kinds, and some also have a Roth or pre-tax option in a workplace plan. The arithmetic shows the trade-off; personal circumstances decide how it applies.

The same pay-now-or-pay-later choice appears inside workplace plans, covered in 401(k) explained, and in Canada as TFSA vs RRSP compared. If you are only getting started, how to start investing covers the first steps, and compounding and time explains the growth factor used here.

You can compare Roth and traditional IRAs

You can now explain how the two IRAs are taxed, how the shared limit and income limits work, what makes a Roth distribution qualified, and when each design keeps more.

Check your understanding

What is the main tax difference between a traditional and a Roth IRA?

A traditional IRA may be deductible with taxed withdrawals; a Roth IRA is not deductible but qualified withdrawals are tax-free. One defers the tax, the other pays it first.

You have both a traditional IRA and a Roth IRA. How does the yearly contribution limit apply?

One limit covers the total you put into all of them. The IRS limit applies to all your traditional and Roth IRAs combined.

Your tax rate is 25% now and 15% when you withdraw. Using the worked example, which IRA leaves more after tax?

The traditional IRA, because tax saved at 25% is paid back at only 15%. A lower rate on the way out favours deducting now.

Which of these is part of what makes a Roth IRA distribution qualified?

It is made after the five-year period that starts with the first tax year a Roth IRA contribution was made. It must also be made at 59½ or later, or because of disability, death or a first home purchase within the lifetime limit.

Common questions

Is a Roth IRA or a traditional IRA better?

Neither is better in general. With the same tax rate when contributing and withdrawing, they leave the same after-tax amount. A lower future rate favours traditional and a higher one favours Roth, and income limits and other circumstances also matter.

Can anyone contribute to a Roth IRA?

No. The amount you can contribute to a Roth IRA phases out as your modified adjusted gross income rises, with ranges that depend on filing status. The IRS publishes the ranges each year.

What is the Roth IRA five-year rule?

A Roth IRA distribution is qualified, and so tax-free, only if it is made after the five-year period beginning with the first tax year a contribution was made to a Roth IRA for you, and it is made at 59½ or later or meets another condition such as disability.

Terms defined in this lesson

• IRA (Individual retirement arrangement)
• Roth account
• Traditional IRA
• Tax deduction
• Marginal tax rate
• Catch-up contribution
• Early withdrawal penalty

Continue

• Previous: The 401(k) explained
• Tax-advantaged accounts explained
• TFSA vs RRSP compared
• How to start investing, step by step
• Compounding and why time horizon matters
• Investment Accounts and Tax track
• All Agenticks lessons
• Trading glossary

Sources

• Internal Revenue Service. (2026). Traditional and Roth IRAs. IRS.gov.
• Internal Revenue Service. (2026). Retirement topics: IRA contribution limits. IRS.gov.
• Internal Revenue Service. (2025, November 13). 401(k) limit increases to $24,500 for 2026, IRA limit increases to $7,500 (News Release IR-2025-111). IRS.gov.
• Internal Revenue Service. (n.d.). Publication 590-B (2025), Distributions from individual retirement arrangements (IRAs). IRS.gov.
• Internal Revenue Service. (2025). Retirement topics: Exceptions to tax on early distributions. IRS.gov.
• Internal Revenue Service. (2026). Roth comparison chart. IRS.gov.

Written and reviewed by the Agenticks Learn editorial team. How we write and check lessons.

Agenticks Learn is general education. It is not financial, investment, tax or legal advice, it does not take your situation into account, and nothing on it is a recommendation to buy, sell or hold any security or to open any account. Examples use illustrative numbers. Investing involves risk, including losing money you put in, and past performance does not predict future results. Tax rules and limits change; the official sources linked in each lesson are the final word.