How each account is taxed, in plain English
Roth IRA: you contribute with after-tax dollars (no deduction). The money grows tax-free for decades, and qualified withdrawals after age 59½ are 100% tax-free. You can withdraw your contributions (not earnings) at any time, with no penalty, Roth doubles as a deep emergency backstop.
Traditional IRA: you contribute with pre-tax dollars (deductible up to certain income limits). The money grows tax-deferred. Every dollar you withdraw in retirement is taxed as ordinary income. Required minimum distributions (RMDs) kick in at age 73 under current law.
2026 contribution limits and income rules
- Annual contribution limit: $7,000 if under 50; $8,000 if 50+ (combined across all your IRAs).
- Roth IRA income phase-out (single): begins around $146,000, fully phased out at $161,000 (figures adjust annually for inflation).
- Roth IRA income phase-out (married filing jointly): begins around $230,000, fully phased out at $240,000.
- Traditional IRA deduction phase-out applies if you (or spouse) are covered by a workplace plan, different income thresholds.
- Earned income required to contribute, investment income alone doesn't count.
The single decision that matters: now vs later tax bracket
If your marginal tax rate today is lower than you expect it to be in retirement, Roth wins. If your rate today is higher, Traditional wins. Most early-career workers are in the 12% or 22% federal brackets, and most retirees end up in the 22% or 24% bracket, so Roth tends to win for under-40s in lower brackets.
High earners in the 32–37% peak brackets often do better in Traditional, capturing the deduction now and paying lower retirement-bracket tax later, particularly if they plan to retire in a no-income-tax state.
When Roth obviously wins
- You're in your 20s or early 30s, bracket is almost certainly going up.
- You're in a 12% or 22% federal bracket today.
- You expect tax rates broadly to rise (a defensible assumption given US fiscal trajectory).
- You want a backstop emergency fund, Roth contributions can be withdrawn anytime, penalty-free.
- You're planning a large estate, Roth has no RMDs, can pass to heirs more efficiently.
When Traditional obviously wins
- You're in the 32%, 35% or 37% federal bracket and need the deduction now.
- You plan to retire in a state with no income tax (Texas, Florida, Tennessee, etc.).
- You want to drop into a lower current-year bracket to qualify for tax credits.
- You're maxing your 401(k) and Traditional contributions are still deductible based on income.
The Backdoor Roth (for high earners above the income limit)
Workers above the Roth income cap can still get money into a Roth via the 'backdoor': contribute non-deductibly to a Traditional IRA, then convert it to a Roth. Done correctly, this is fully legal and recognised in IRS guidance, but the pro-rata rule complicates things if you have other pre-tax IRA balances.
If you have any Traditional, SEP or SIMPLE IRA balance, the conversion is taxed proportionally on those existing pre-tax dollars too. Most clean Backdoor Roth executions roll those balances into a 401(k) first to clear the slate.
Common mistakes
- Picking Traditional purely because you 'don't want to pay tax now', ignores future tax exposure.
- Putting all retirement savings in Traditional and ending up with a 7-figure RMD problem at age 73.
- Failing to actually invest the money inside the IRA, the account is a wrapper, not an investment.
- Withdrawing Roth earnings before 59½ and triggering tax + 10% penalty.
- Forgetting to file Form 8606 for non-deductible contributions or Backdoor Roth conversions.
