Understanding IRAs: traditional and Roth

An individual retirement arrangement – known commonly by its initials, IRA – is a powerful retirement saving tool. Even if you’re contributing to an employer-sponsored retirement plan, such as a 401(k), you may be eligible to open an IRA and boost your retirement savings.

There are two main types of IRA: traditional and Roth. Deciding which is right for you – or if both might have a role in your financial plan – could depend on a variety of factors, including short-term and long-term tax implications, how you plan to use the funds and whether the IRA will be part of your estate plan.

Key features

Traditional and Roth IRAs are both tax-sheltered retirement vehicles. Both offer flexibility in terms of investment options. And both have the same annual contribution limits: In 2025, you can contribute up to $7,000 in aggregate to a Roth and/or traditional IRA, with account owners 50 and older eligible to make an additional catch-up contribution of $1,000.

To be eligible, you must have at least as much taxable compensation as the amount of your IRA contribution. If a couple is married and filing jointly, each spouse can contribute to an IRA in their name even if one does do not have necessary taxable compensation, provided the other spouse has enough taxable compensation to support contributions to both.

The major difference between traditional and Roth IRAs is that traditional IRAs offer a tax deduction at the time of the contribution, whereas Roth IRAs offer tax-free income at the time of withdrawal. Here’s how that works.

Traditional IRAs and taxes

When you contribute to a traditional IRA, you’re reducing your taxable income, lowering your overall tax burden. The amount you can deduct depends on your modified adjusted gross income (MAGI) and your filing status.

If neither you nor your spouse is covered by a work-sponsored retirement plan, you can generally deduct the full amount of your annual IRA contribution. If one or both of you is covered by such a plan, the amount you’re allowed to deduct depends on your modified adjusted gross income (MAGI) and tax filing status.

In 2025, if you are covered by a work-sponsored plan and filing as single or head of household, MAGI of $79,000 or less qualifies for a full deduction. If MAGI is above $79,000 and less than $89,000 the deduction will be limited. Those with MAGI of $89,000 or more cannot take a deduction.

For married couples filing jointly, there scenarios are more complex. If both spouses are covered by an employer sponsored plan the pertinent amounts are $126,000 to $146,000. If only one spouse has an employer-sponsored plan, the MAGI thresholds for the covered spouse are $126,000 to $146,000, but for the spouse that is not covered the thresholds rise to $236,000 to $246,000. If MAGI is $246,000 or more, a deduction cannot be taken.

It is worth noting even if a taxpayer is over the MAGI limit for deductions, they can still make an after-tax contribution – there are no restrictions on contributing, just on tax deductions.

When you take distributions from traditional IRAs, the portion that represents deductible contributions will be subject to income tax. If you withdraw funds prior to age 59.5, you are also required to pay a 10% early withdrawal penalty. There are exceptions that allow you avoid the penalty, such as disability and disaster recovery, with a full list of exceptions accessible on IRS.gov.

You can defer taking distributions from your traditional IRA until April 1 of the year following the year you reach age 73, or 75 if you were born in 1960 or later. That’s when you must start taking required minimum distributions (RMDs).

After your first year RMD, you are required to take an RMD by the end of every calendar year for the rest of your life or until your funds are depleted. You can withdraw more than required in any given year if you want to, but you can’t take less than your annual RMD. If you withdraw less, you’ll be charged a 25% penalty on the difference between the RMD amount and the amount you actually withdrew, though if you self-correct in a timely manner the IRS may reduce your penalty to 10%.

You’ll want to seek the advice of a financial professional to ensure you’re taking the appropriate RMD to avoid any penalties and meet your financial retirement goals.

Roth IRAs and taxes

While contributions to a Roth IRA are not tax deductible, the primary benefit of these accounts is that withdrawals of your original contributions are free of federal income tax, and possibly state income tax. Provided certain criteria are met, withdrawals of investment earnings are tax-free, as well.

Your ability to contribute to a Roth IRA depends on your MAGI and income tax filing status. While the ability to contribute and deduct to a traditional IRA is dependent on participation in an employer retirement plan, Roth IRA eligibility is determined only by MAGI.

In 2025, if you file as single/head of household with a MAGI of $150,000 or less you can contribute the full amount. If MAGI is more than $150,000 and less than $165,000, contributions are limited, while those with MAGI of $165,000 or more cannot contribute to a Roth IRA. For married couples filing jointly, the pertinent amounts are $236,000 and $246,000.

When it comes time for distributions, money in a Roth IRA is divided into three categories: contributions, conversions and earnings.

• Contributions, the after-tax money you contributed to the account, are always distributed first and are tax-free and penalty-free.
• Conversions, money you converted from a 401(k) or traditional IRA, are distributed after contributions and are always tax-free but subject to penalty unless a five-year holding period is met, or you are 59.5 or older.
• Earnings, the growth your investments experienced, are distributed last and tax-free if the Roth has been established for five years and you are either 59.5, disabled, the funds are used for a first-time home purchase (up to $10,000), or if they are withdrawn by the Roth beneficiary or account holder’s estate after the account holder’s death. The earnings may also be subject to 10% penalty if an exception is not met.

Another benefit of the Roth IRA is that there are no RMDs if you are the Roth IRA owner. You are not required to take any distributions unless you need the income. You may choose to leave the entire balance to your beneficiary without ever drawing from the account.

Which is right for you?

While each type of IRA has unique benefits, one may be a better fit to achieve your financial goals. Remember, not everyone qualifies for both types of IRAs; your MAGI and other factors may dictate the type of IRA for you. But as long as you meet the earned income requirements and contribution limits depending on tax filing status, you can contribute to a traditional or a Roth IRA.

If you don’t qualify for tax-deductible contributions to a traditional IRA, you want to reduce taxes during retirement, or want to preserve assets for your beneficiaries, then a Roth IRA may be a more effective choice for your goals. But if you’re trying to lower your annual tax bill while you’re still working, and assuming you’re in a higher tax bracket now than you will be during retirement, a traditional IRA may make more sense.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation.

Contributions to a traditional IRA may be tax-deductible depending on the taxpayer’s income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.

Like Traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free.

Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax- free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

IRA tax deductibility and contribution eligibility may be restricted if your income exceeds certain limits, please consult with a financial professional for more information.

This material has been created by Raymond James for use by its financial advisors.