Traditional or Roth IRA? Key Differences to Know Before You Invest

One of the most frequent questions we get as Financial Advisors is, “Should I invest in a Traditional or Roth IRA?” The differences may seem minor, but they can have outsized consequences on your financial future depending on your current expenses, tax bracket, and future earning potential. Both accounts are great vehicles for retirement savings and follow some of the same rules:

• Contribution Limits: For the 2024 and 2025 tax years, both Traditional and Roth IRAs have a contribution limit of $7,000, with a catch-up contribution of an additional $1,000 for those over age 50.
  • There are income limits that can affect the amount you can contribute, which will be described in more detail below.
• Earned Income: You can only contribute to IRAs if you have reported earned income to at least the amount you would like to contribute. 
• Withdrawal Age: Both accounts can carry a 10% early withdrawal penalty if funds are taken out before age 59½, with a few exceptions.
• Contribution Deadline: The deadline to contribute is the tax filing deadline for the current tax year. However, between the end of the calendar year and the tax deadline, you can contribute for both the previous and the current years if they have not already been made.
• Rollovers: Both traditional and Roth 401(k)s can be rolled into IRAs when leaving or changing employers, so even if you do not have one of these accounts now, you will likely have one in the future, so it is important to understand the rules and regulations around them.

Traditional IRAs

• Taxation of Contributions: Traditional IRAs provide immediate tax benefits, as the contributions are "pre-tax" and are deductible in the year they are made. Because of this, you can reduce your taxable income and save on taxes at the end of the year.
• Income Restrictions (2025): As a single tax filer, if you make over $89k ($146k for married filing jointly) in modified adjusted gross income (MAGI), you will not be able to receive a tax deduction for your contribution to a Traditional IRA. If you make between $79k-$89k ($126k-$146k for MFJ), the amount will be prorated by a schedule provided by the IRS.
• Taxation of Distributions: Since you received the tax benefits in the year you contributed, you will be required to report the withdrawals in retirement as taxable income at your applicable ordinary income rate.
• Required Minimum Distributions (RMDs): After you reach a certain age (75 for those born after 1960), you will be required to begin withdrawing from the account and paying the required ordinary income taxes on those distributions. The amount withdrawn will be calculated by dividing the account value at the end of the previous year by a distribution period as prescribed by the IRS.

Roth IRAs

• Taxation of Contributions: Roth IRA contributions require you to use “after-tax” funds to invest in the account. This means that you will pay the normal income tax rate on the contributions in the year they are made.
• Income Restrictions (2025): As a single tax filer, if you make over $165k ($246k for married filing jointly) in modified adjusted gross income (MAGI), you will not be able to contribute to a Roth IRA. If you make between $150k-$165k ($236k-$246k for MFJ), the contribution amount will be prorated by a schedule provided by the IRS.
• Taxation of Distributions: Since you paid the taxes before contributing to the account, any distributions will be received tax-free in retirement (after age 59½).
• Required Minimum Distributions (RMDs): Roth IRAs do not require RMDs, as the taxes on the funds in the account have already been paid.

Consider a Traditional IRA if...

• You could use a reduction in your taxable income in the year the contribution is made, as the contributions are deductible against ordinary income.
• You make less than $89k as a single tax filer or $146k for couples who are married filing jointly.
• You expect to be in a lower tax bracket in retirement.

Consider a Roth IRA if...

• You can afford paying taxes on your IRA contributions in the year they are made, as Roth IRA contributions are made “after-tax.”
• You make less than $165k as a single tax filer or $246k for couples who are married filing jointly.
• You expect to be in a higher tax bracket in retirement, as you will be paying the taxes now instead of when they are withdrawn in retirement.

Although funding IRAs can greatly help you build your retirement savings, the limits on contributions may render them insufficient on their own. Therefore, they should be used in conjunction with other savings vehicles to reach your ultimate savings goals as part of an overall financial plan. At Wolf Group Capital Advisors, we regularly work with our clients to determine appropriate saving options for retirement and how to implement them effectively. 

Sincerely,

Andrew P. Gary, CFP®

Financial Advisor 

About Wolf Group Capital Advisors

At Wolf Group Capital Advisors, a comprehensive wealth management firm and Registered Investment Advisor (RIA) based in the Washington, D.C. metropolitan area, nothing is more important than the fiduciary responsibility we have in managing your wealth. Taking the utmost care, we focus on providing advice tailored to your specific circumstances. With more than two decades advising U.S. expatriates and non-US citizens employed by international organizations, we are qualified in investment strategies addressing global issues. Empathy and curiosity—combined with our experience in life planning and investment management—enable you to explore a wider set of possibilities that can lead to a fulfilling life you’ve worked hard to attain.

Disclosure:

The views expressed represent the opinions of Wolf Group Capital Advisors as of the date noted and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. The information contained has been compiled from sources deemed reliable, yet accuracy is not guaranteed.  

Diversification and asset allocation do not ensure a profit or guarantee against loss.

The information presented is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third-party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way whatsoever. This presentation may not be construed as investment, tax or legal advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and is subject to change without notice.