If you’ve started planning for retirement, or have even just started researching how to do it, it’s very likely you’ve come across the acronym IRA, short for individual retirement arrangement (its formal IRS name), or, more commonly, the individual retirement account.

No matter how you refer to it, an IRA is a good option to consider if you’re trying to build a nest egg — particularly if you don’t have access to a 401(k) plan at work or you feel you need to save above and beyond your 401(k) contributions. Simply put, an IRA is a special type of investment account specifically meant for retirement savings that provides tax advantages that you can’t get from a regular taxable brokerage account. You can use your IRA to invest in a variety of assets, from stocks to bonds to cash investments.

For individuals with taxable income, there are two main types of IRAs to choose from: the traditional IRA and the Roth IRA. (There are other types of IRAs for small business owners and the self-employed, but we’ll tackle that another time.) There are as many differences as similarities between them, and the various rules and guidelines surrounding them can seem a bit confusing.

But it’s crucial to be clear on what these are so that you can better decide which type of IRA makes sense for your situation.


The maximum amount you can contribute to a traditional or Roth IRA in a given year (that is, from January 1 until your tax returns are due the following April) is the same, although the IRS may change the actual dollar limit based on inflation. For 2019, the most you can contribute to either type of IRA is $6,000. If you’re 50 and over, you get an extra $1,000 catch-up contribution, so your total is upped to $7,000. (Note, however, that if your taxable compensation is less than the IRA contribution limits, you can contribute only as much as you make.)

If you decide to be a retirement super-saver and open more than one IRA, your contribution limit between all of them is still $6,000/$7,000. In other words, you can’t save, say, $12,000 between two IRAs.

One more note about contributions: After age 70½, you can no longer make contributions to a traditional IRA. With a Roth, you can keep putting money in for as along as you want, as long as you meet certain IRS income requirements (more on that below).


How your taxes are treated within each type of IRA is arguably where the biggest differences between a traditional and a Roth lie.

For traditional IRAs: When you contribute to a traditional IRA, you’re potentially using pre-tax dollars that can help lower your taxable income. So, for example, if you make $60,000 and end up contributing $6,000 to a traditional IRA over the course of a year, the IRS may tax you on only $54,000 of income.

However, we say “may” because whether or not you can take the full amount of your deduction depends on a combination of factors, like whether you or your spouse are covered by a retirement plan at work. If neither of you are, then you’re free to take the full deduction for your IRA.

If you or your spouse do have a workplace retirement plan, then whether you can take the full deduction, a partial deduction or no deduction depends on your modified adjusted gross income and your tax filing status. For example, if you’re a single filer and have a 401(k), if your modified adjusted gross income is over $64,000, your traditional IRA deduction starts to phase out. (Yes, we know it’s confusing; to see what the IRS guidelines are, check out their IRA deduction limits page.)

The other important thing to know is that with a traditional IRA, your taxes are deferred — that means that while you may get a tax deduction now, you will pay taxes on both your contributions and any investment growth when you withdraw your money in retirement. (Withdrawing your money younger than age 59½, however, could subject you to an additional 10 percent tax penalty.)

For Roth IRAs: With a Roth, you don’t get any tax deductions on the contributions you make now. In other words, if you want to place $6,000 in a Roth, you’re using post-tax money. The good news? Your withdrawals in retirement — including any investment growth — is tax-free, assuming your withdrawals are done at age 59½ or older, and you’ve owned your Roth account for at least five years.

There is one other unique feature to a Roth: You can always access the contributions you make (though not the investment growth) without paying additional taxes on it, regardless of age. But again, remember that this account is geared toward retirement, so withdrawing any funds early could have a big impact on what you save for retirement, as you could be missing out on investment growth on that money.


Income restrictions for a traditional IRA lie primarily around whether you’re trying to get a full or partial tax deduction on your contributions. You don’t have to meet any income guidelines simply to contribute to a traditional IRA, however.

For a Roth you do have to meet income requirements, which vary based on your tax filing status. For instance, for 2019, if you’re a single filer with a modified adjusted gross income of $137,000 or more, you can’t contribute at all to a Roth IRA. If you make less than $122,000, you can contribute up to the full limit. If your income falls somewhere in between, you’ll be allowed to make a reduced contribution based on an IRS formula. (For more specifics and to see how the reduced-contribution formula is calculated, check out the IRS page on Roth IRA contribution limits.)


The age at which you can start withdrawing money from both a traditional and Roth IRA without fear of paying early-withdrawal penalties is 59½. But with a Roth only, you always have access to your contributions regardless of your age — although you can't withdraw the earnings without taxes or penalties until you’ve owned your account for at least five years and have met the age requirement. (There are a few other exceptions to the early-withdrawal penalties, including if you are disabled or want to put the money toward your first home.)

One other difference is that with a traditional IRA, you’re subject to a required minimum distribution (RMD) — that is, a minimum amount that you have to begin withdrawing each year from your account, starting on April 1 after you turn age 70½. Failure to follow this rule can mean severe tax penalties. The Roth IRA, however, is not subject to the RMD rule, so you could theoretically leave your money in that account until you pass away.


If your current income puts you in a low tax bracket now, then you may want to consider a Roth IRA, since you likely won’t need as big of a tax break now, suggests Ron Finkelstein, CPA, a tax partner at the Melville, New York, office of Marcum LLP, a firm that provides accounting and advisory services. On the flip side, if you’re in a high tax bracket and looking for ways to reduce your taxable income, “you might want to take the tax deduction [from a traditional IRA] now,” Finkelstein says.

That said, you should look at your retirement savings within the bigger picture of your financial plan and decide what mix of pre- and post-tax contributions make sense for your situation — now as well as in the future.

This publication is not intended as legal or tax advice. Taxpayers should seek advice based on their particular circumstances from an independent tax advisor.

This article has been updated to reflect 2019 contribution limits.

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