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  • Roth vs Traditional Retirement Plans: What’s the Difference?

    Apr 22, 2025 12:00 pm by Andrea Pellegrini & Richard Owusu-CyrusNewsEarnEducationSave
    A man in a chair in front of some trees with white text that states Roth vs Traditional Retirement Plans: What’s the difference?

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    Roth vs Traditional Investment Products: What’s the difference?

    When it comes to retirement-focused investing, understanding the tax treatment and rules of different accounts is essential for long-term financial planning. In the U.S., these typically fall into two main categories: Traditional and Roth accounts.

    Defined Benefit vs. Defined Contribution Plans

    Employer-sponsored retirement plans are typically either defined benefit (pensions) or defined contribution (like 401(k) or 403(b) plans). Defined benefit plans guarantee a specific benefit in retirement, while defined contribution plans shift investment control and risk to the employee.

    Individual Retirement Accounts (IRAs) are personal retirement accounts not tied to an employer, and they also come in Traditional and Roth versions. IRAs are also considered a defined congribution plan since the risk and control is in the hands of the plan owner.

    Tax Treatment Differences

    The primary difference between Roth and Traditional investment products lies in when taxes are paid.

    With Traditional accounts, contributions may be tax-deductible, reducing taxable income in the contribution year. Earnings grow tax-deferred, and taxes are paid upon withdrawal in retirement. Required Minimum Distributions (RMDs) begin at age 73 (per the SECURE Act, IRS, 2023). Earnings withdrawals before age 59½ may be subject to taxes and penalties unless an exception applies (e.g., first-time home purchase, qualified education expenses).

    In Roth accounts, contributions are made with after-tax dollars, meaning you pay taxes upfront but there is no immediate tax deduction. Earnings grow tax-free, and qualified withdrawals in retirement are also tax-free. Roth accounts do not have any required minimum distributions during the account holder’s lifetime. However, inherited Roth accounts require non-spouse beneficiaries to empty the account by the end of the 10th year following the account owner’s death (IRS, 2024).

    Contribution Limits & Eligibility

    Individual Retirement Account Limits & Eligibility

    For either Traditional or Roth IRAs, the annual contribution limit is $7,000 as of 2025 if under the age of 50. If age 50 or older, you can contribute up to $8,000 in 2025 which includes a $1,000 catch up contribution.

    If you contribute to both Traditional and Roth IRAs, the combined amount may not exceed the contribution limit laid out by the IRS. The contribution limits change periodically to adjust for inflation and increased cost of living.

    Employer-Sponsored Plan Limits & Eligibility for 401(k), 403(b), and 457

    For the 2025 tax year, the IRS increased the contribution limit to $23,500 for people under age 50 contributing to employer-sponsored plans, including 401(k)s, 403(b)s, 457s, and the federal government’s Thrift Savings Plan (IRS, 2024). There is also a catch-up contribution limit of $7,500 for 2025.

    Income Limits

    Any contributions to traditional retirement plans that exceed the contribution limit cannot be used in calculating a tax deduction.

    As your income increases, whether and depending on if you have an employer-sponsored retirement plan, the potential deduction you can claim for contributions made to a retirement plan may be phased out – i.e., the amount you qualify for decreases as your income increases. Once you reach a certain income level, the benefit disappears entirely. It's not an all-or-nothing change; it's a gradual reduction until it's gone. These phase-outs are based on your Modified Adjusted Gross Income (MAGI).

    Retirement Plan Contribution and Income Limits (2025)
    Plan TypeContribution Limit (Under 50)Catch-Up (50+)Income Limits (MAGI)
    Traditional IRA$7,000$1,000Deduction phases out if covered by a workplace plan:
    $79k–$99k (Single),
    $126k–$146k (Married Filing Jointly)
    Roth IRA$7,000$1,000Contribution eligibility phases out:
    $150k–$165k (Single),
    $236k–$246k (Married Filing Jointly)
    401(k)/403(b)/457(b)$23,500$7,500No income limits for contributions


    How to Choose Between Roth and Traditional Accounts

    Your choice depends on several key factors and consulting a financial professional can help make the choice easier:

    1. Current vs. Future Tax Situation

    If you expect to be in a higher tax bracket in retirement, a Roth account may be beneficial, as withdrawals will be tax-free later.

    If you think you will have a lower taxable income in retirement, a Traditional account may be preferable since you get an upfront tax deduction now.

    2. Tax-Free Growth vs. Immediate Tax Savings

    Roth: Pay taxes upfront, but earnings grow tax-free, and withdrawals in retirement are not taxed.

    Traditional: Contributions are tax-deductible, reducing taxable income now, but withdrawals are taxed later.

    3. Flexibility & Access to Funds

    Roth accounts allow contributions to be withdrawn anytime penalty-free. Earnings withdrawals before 59½ may be taxed unless exceptions apply.

    Traditional accounts impose penalties for withdrawals before age 59½, unless qualifying exceptions apply.

    4. Employer Plans & Matching Contributions

    Under the SECURE 2.0 Act, employers can now offer the option for matching contributions towards Roth accounts.

    However, most employer matching contributions still go into Traditional accounts.

    If you have access to both types of accounts through an employer, understand the differences and details surrounding any employer match contributions including vesting requirements (IRS, 2025).

    5. Required Minimum Distributions (RMDs)

    Roth accounts have no Required Minimum Distributions (RMDs), allowing funds to continue growing tax-free for estate planning or future use.

    Traditional accounts require withdrawal or RMDs starting at age 73, which could impact your tax burden in retirement.

    6. Estate Planning Benefits

    Roth accounts allow heirs to inherit tax-free funds with no mandatory withdrawals, offering long-term tax advantages.

    Traditional accounts may be subject to RMDs for beneficiaries, affecting tax treatment.

    Expanding Roth Beyond Retirement

    While primarily used for retirement, Roth accounts can support other investment goals:

    • Education Savings: Roth IRAs allow penalty-free withdrawals for qualified education expenses.
    • Homeownership: Up to $10,000 in Roth IRA earnings can be withdrawn penalty-free for a first-time home purchase.
    • Long-Term Wealth Planning: The lack of RMDs makes Roth IRAs useful for legacy planning, letting funds grow tax-free for heirs.

    Calculators

    To compare accounts based on your situation, you can try these tools.

    Investor.gov Calculators

    Calculators and other tools provided through the US Securities and Exchange Commission on Investor.gov are designed to help investors make informed decisions with unbiased information.

    Disclaimer: The calculators listed below are for educational purposes only and are not an endorsement of the companies providing them. Results are estimates, not financial advice.

    IRA Calculators

    • Bankrate IRA Calculator
      Estimate how your IRA contributions can grow over time and what your potential tax savings might be with this easy-to-use tool from Bankrate.
    • Calculator.net IRA Calculator
      A versatile IRA calculator that allows you to project future value for both Traditional and Roth IRAs, factoring in contributions, tax status, and expected returns.
    • Charles Schwab IRA Calculator
      Schwab’s IRA calculator helps you estimate retirement savings growth based on your current age, savings rate, and investment preferences.
    • Chase Bank IRA Calculator
      A straightforward tool from Chase Bank to compare Traditional and Roth IRA savings projections based on your inputs for age, contributions, and rates of return.
    • Fifth Third Bank IRA Calculator
      Use Fifth Third Bank’s IRA tool to project the growth of your retirement savings while considering annual contributions and hypothetical investment returns.
    • MoneyChimp IRA Calculator
      A simple retirement calculator from MoneyChimp, allowing you to estimate IRA account growth while adjusting for contributions and expected market returns.
    • VOYA IRA Calculator
      VOYA’s IRA calculator provides an interactive way to see how different contribution levels and years to retirement can impact your total IRA savings.

    401(k) & 403(b) Calculators

    • Bankrate 401(k) Calculator
      Calculate how much your 401(k) or 403(b) plan could grow by retirement, factoring in your salary, contributions, employer match, and investment return assumptions.
    • Citizens Bank 401(k) Calculator
      A tool from Citizens Bank to estimate future retirement account balances based on your savings habits and employer contributions.
    • Charles Schwab 401(k) Calculator
      Schwab’s 401(k) calculator projects your retirement plan balance at retirement and helps you visualize how different contribution rates and returns can affect your savings.
    • VOYA Retirement Plan Calculator
      VOYA’s retirement plan calculator estimates the value of your 401(k) or 403(b) account over time, taking into account contribution percentages, employer match options, and projected returns.

    What about rollovers?

    Rollovers allow you to transfer retirement funds from one account to another without triggering taxes or penalties, provided they follow IRS rules.

    If you leave an employer that offered an employer-sponsored retirement plan, that account does not follow you to the next employer. However, you can withdraw those assets and contribute it to another retirement plan within 60 days without incurring penalties as long as you aren’t converting from a Traditional (tax-deferred) to a Roth (after-tax) type of retirement account (IRS, 2024).

    For example, a traditional 401(k) can be rolled over directly to a traditional IRA without any penalties or tax liabilities. But if you convert your traditional 401(k) to a Roth IRA, you will need to pay taxes on the amount you’ve withdrawn from the traditional account to deposit in the roth account within that tax year.

    Summary

    Selecting between Roth and Traditional investment accounts depends on your current financial situation, tax strategy, and long-term goals. Each option offers distinct advantages:

    • Roth accounts provide tax-free growth and no lifetime Required Minimum Distributions (RMDs)
    • Traditional accounts offer immediate tax deductions but require taxable withdrawals in retirement

    To make the most of your retirement savings, it's essential to assess your current and anticipated future tax brackets, understand how employer-sponsored plans can enhance your savings, and consider the estate planning benefits of each option.

    Since everyone's financial situation is unique, consulting financial professionals can provide tailored insights and help you navigate IRS regulations, income eligibility, and the right investment mix for your future. Planning ahead ensures financial security, tax efficiency, and flexibility in retirement.

    Resources and Additional Information

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