Roth IRA vs. Traditional IRA: What’s the difference?

This article is for informational purposes only and does not constitute tax, legal or financial advice. Tax rules and retirement account regulations can vary by individual circumstance. You should consult a qualified tax or financial professional before making any retirement or investment decisions.

Overview: Roth IRA vs. Traditional IRA

The Roth IRA and the Traditional IRA are two of the most common types of Individual Retirement Accounts (IRAs). Both are designed to help you save and invest for retirement, often with tax advantages that support long-term growth.

While they share the same overall purpose, they differ in how taxes are handled over time.

Rather than thinking of one as better, it may be more helpful to think of them as two different approaches to retirement planning, each with its own rules and trade-offs. When people compare Roth and Traditional IRAs, they often focus on questions like:

• When taxes apply
• Who can contribute and how much
• How withdrawals work before and after retirement
• Whether required minimum distributions apply
• What happens if you want to convert one account type into the other

IRA tax differences explained

A Roth IRA and a Traditional IRA are often compared based on how they’re taxed. In reality, both accounts involve taxes – the difference is when you pay them.

With a Roth IRA, you contribute after-tax dollars. That means you pay income tax on the money first, before it enters the account. Once inside, the account can grow without additional tax impact and qualified withdrawals in retirement are typically not taxed.

Learn how to open a Roth IRA

With a Traditional IRA, contributions may be deductible depending on income and workplace retirement coverage. Investments grow tax-deferred, meaning gains aren’t taxed each year. On the flip side, withdrawals in retirement are generally treated as taxable income.

Learn how to open a Traditional IRA

This is why Roth vs. Traditional IRA comparisons often come down to one simple question – assuming IRS eligibility requirements are met: Would you rather pay taxes now or later?

Some people prefer the Roth IRA structure if they expect higher taxes in retirement. Others may value the upfront deduction that a Traditional IRA can provide today. Because tax outcomes depend on income, timing and future circumstances, it’s usually best to approach the decision as a long-term trade-off rather than a one-size-fits-all answer.

When IRA taxes occur

A simple example can help to clarify the timing difference:

Imagine you contribute $7,500 into an IRA.

With a Roth IRA, you pay income tax on that $7,500 today. The account may grow over time and qualified withdrawals in retirement are typically tax-free.

With a Traditional IRA, you may be able to deduct the $6,000 contribution this year, reducing taxable income now. But when you withdraw the money in retirement, those withdrawals are generally taxed as income.

Roth and Traditional IRA contribution rules and limits

Both Roth and Traditional IRAs are subject to IRS rules around eligibility and contributions, including annual limits, eligibility requirements and income restrictions for certain account types. These rules are designed to encourage retirement saving while limiting how much tax-advantaged money can be placed into these accounts each year. 

For 2026, the IRA contribution limit is $7,500 for individuals under the age of 50 and $8,600 for those 50 or older (including a $1,100 catch-up contribution).

One important point is that Roth and Traditional IRAs share a combined contribution cap. That means you can’t contribute the maximum amount to both accounts separately. The annual IRS limit applies across all IRA contributions combined.

To contribute to either IRA type, you generally need earned income. Earned income includes wages or income from self-employment. Investment income alone typically doesn’t qualify.

In some households, a spousal IRA contribution may be possible. This allows a working spouse to contribute on behalf of a non-working spouse, as long as IRS requirements are met.

Read all about IRA contribution limits

Income eligibility for Roth IRA

Roth IRAs have direct income limits. The IRS sets phase-out ranges each year based on modified adjusted gross income (MAGI). If your income exceeds the threshold, you may not be able to contribute directly to a Roth IRA.

Traditional IRAs don’t restrict contributions based on income. However, the ability to deduct contributions may phase out at higher income levels if you’re covered by a workplace retirement plan.

IRA withdrawal rules

Withdrawal rules determine how flexible the account is before retirement and how withdrawals are taxed later. These rules are one reason Roth IRAs are sometimes viewed as more flexible, especially for those who want access to contributions before retirement age.

Roth IRA

• Your original contributions (cost basis) can generally be withdrawn at any time. Since you already paid taxes on those dollars, the IRS allows more flexibility when accessing your cost basis compared to earnings.
• Withdrawing investment earnings is different. Earnings may be taxed or penalized if taken too early, unless the withdrawal qualifies under IRS rules.

Traditional IRA

• Withdrawals are generally taxed as ordinary income. Taking money out before age 59 ½ may also result in an additional penalty, although certain exceptions exist. 
• Because Traditional IRA contributions were often tax-deductible, the IRS taxes withdrawals later when the money is distributed.

Five-year rule (Roth)

The Roth IRA five-year rule is often misunderstood, but it plays an important role in determining when withdrawals become tax-free or penalty-free. The rule applies differently depending on what you withdraw:

1. Contributions can generally be withdrawn anytime.
2. Earnings can only be withdrawn tax-free if the Roth IRA has been open for at least five years and you meet a qualifying condition (such as being age 59 ½).
3. Conversions have their own five-year clock, meaning converted funds may face penalties if withdrawn too soon.

IRA Required Minimum Distributions (RMDs)

RMDs are mandatory withdrawals that apply to Traditional IRAs once you reach an IRS-defined age. That means, once you reach the required age, you must withdraw at least a minimum amount each year. These withdrawals are generally taxable and failing to take them may result in penalties.

Roth IRAs work differently – they don’t require RMDs for the original account owner. This means the account can potentially remain invested longer, which may matter for long-term planning.

Conversion from one IRA to another 

A conversion is when you move money from a Traditional IRA into a Roth IRA. Some people consider doing this to change how their retirement withdrawals are taxed later on. But converting usually comes with an upfront tax cost.

When you convert funds, the converted amount is typically treated as taxable income in that year. Taxes are owed upfront because Traditional IRA dollars were often contributed pre-tax.

A common search question is: Can you convert without paying taxes? In most cases, the answer is no. Converting pre-tax Traditional IRA funds into a Roth IRA generally creates a taxable event.

IRA rollover vs. conversion

The terms rollover and conversion are often confused. A rollover typically refers to moving retirement funds between accounts of the same tax type, often without immediate tax consequences. A conversion refers specifically to moving money from a Traditional to a Roth IRA, which is generally taxable.

Can you have both a Roth and Traditional IRA?

Yes, it’s possible to have both a Roth IRA and a Traditional IRA, subject to eligibility rules specified by the IRS. However, the combined annual contribution limit still applies across all IRAs. You can’t contribute the maximum amount to each account separately in the same year.

Contribution limits explained

Side-by-side comparison of Roth vs. Traditional IRAs

How to choose between Roth and Traditional IRA

Choosing between a Roth IRA and a Traditional IRA depends on your financial situation and long-term expectations. Many people consider factors like current income, expected retirement income and how taxes may apply over time.

A Roth IRA may appeal to those who prefer paying taxes now, especially if they expect to be in a higher tax bracket later. A Traditional IRA may appeal to those who want a deduction today and expect lower taxable income in retirement.

It can also help to think about flexibility. Roth IRAs allow contributions to be withdrawn at any time, which some people find useful. Traditional IRAs are generally structured around retirement-age withdrawals and have RMD requirements later.

How to open an IRA 

Opening a Roth or Traditional IRA is usually a straightforward process, though requirements vary by provider. In most cases, the steps include:

1. Choosing a financial institution or brokerage.
2. Deciding whether you want a Roth IRA or Traditional IRA.
3. Completing an account application.
4. Funding the account through contributions, transfers or rollovers.

Before opening an IRA, it may help to compare providers based on fees, investment choices, and account tools. 

Choosing the right IRA provider

Choosing an IRA provider is an important part of long-term retirement planning. People often look at factors such as:

• Account fees and minimums
• Investment options available
• Platform usability and tools
• Customer support and educational resources

The Crypto.com Stocks IRA: What users should know

Crypto.com Stocks offers an IRA account that gives US users a way to invest for retirement directly through the Crypto.com App. If you’re eligible, you can open either a Roth or Traditional IRA, depending on how you want taxes to apply over time.

The account follows standard IRS retirement account rules and may be funded through annual contributions, IRA transfers or rollovers from an old employer plan such as a 401(k). 

With access to thousands of US stocks and ETFs, the Crypto.com Stocks IRA is designed to integrate retirement investing alongside other stocks features on our App.

Open a Crypto.com Stocks IRA account

FAQs about Roth IRAs vs. Traditional IRAs

Which is better – a Roth or Traditional IRA?

Neither is ‘better’. Your choice depends on your tax situation and retirement expectations. Roth IRAs are taxed upfront, while Traditional IRAs are generally taxed when withdrawn. Many people compare them based on whether they expect taxes to be higher now or later.

Can I have both a Roth and Traditional IRA?

Yes, you can own both account types, but the annual IRS contribution limit applies across all IRAs combined.

What’s the main difference between Roth and Traditional IRA?

The biggest difference is tax timing. Roth IRAs use after-tax contributions, while Traditional IRAs may offer deductions now but withdrawals are taxed later.

Why does a Roth IRA have income limits?

Roth IRAs have income limits because qualified withdrawals are tax-free. The IRS restricts access above certain income thresholds.

Why do people convert a Traditional IRA to Roth?

Some people convert to potentially access tax-free withdrawals later. Conversions are typically taxable in the year they occur.

Can I convert a Traditional IRA to Roth without paying taxes?

In most cases, no. Converting Traditional IRA funds into a Roth IRA generally creates a taxable event.

Does a Roth IRA grow faster?

Growth (or losses) depends on the investments inside the account, not the IRA type. The difference is how withdrawals are taxed later.

Do Roth IRAs have RMDs?

Roth IRAs don’t require RMDs for the original account owner, unlike Traditional IRAs.

What’s the Roth IRA five-year rule?

The five-year is when Roth IRA earnings or converted funds can be withdrawn tax-free or penalty-free, depending on withdrawal type.

This is informational content sponsored by Crypto.com and should not be considered as investment advice.

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