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Traditional and Roth IRAs

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Tax now or tax later. That choice, plus RMDs and penalties, is the core of what the SIE asks about retirement accounts.

The rule
  • Traditional: deductible in, taxed out, RMDs from 73.
  • Roth: after-tax in, tax-free qualified withdrawals, no lifetime RMDs for the owner. Either way, the taxable part of a withdrawal before 59 and a half costs an extra 10 percent unless an exception applies.

One decision: pay the tax now or pay it later

A traditional individual retirement account takes money before tax. A qualifying contribution is deducted from taxable income in the year it is made, the account grows without annual tax, and deductible contributions and earnings withdrawn later are taxed as ordinary income. The deduction can be reduced or removed where the saver or a spouse is covered by a workplace plan and income is above the relevant thresholds.

Keep reading: 3 more paragraphs (about 2 min)

A Roth account reverses the order. Contributions are made from money that has already been taxed and are never deductible, the account grows without annual tax, and a qualified withdrawal comes out entirely free of federal tax, growth included. The trade is between a deduction today and a tax-free withdrawal decades from now, and the right answer depends on which tax rate the saver expects to face.

Two rules separate the two accounts once the money is in. A traditional account is subject to required minimum distributions: from age 73 the owner must draw down and pay tax whether or not the money is needed. Only the first one may be delayed, until 1 April of the following year, and every later one is due by 31 December of its own year — so delaying the first means taking two in a single tax year and paying tax on both. A Roth account has no lifetime required distributions for the original owner, which makes it the more flexible vehicle for someone who does not need the income.

Both share a single annual contribution limit across all of a person’s individual retirement accounts, and it is capped by taxable compensation. For the 2026 tax year that limit is $7,500, rising to $8,600 for a person aged 50 or over, and the limits are reset each tax year. Money taken out before age 59 and a half is an early distribution: the part that must be included in income is taxed as it normally would be and carries an additional 10 percent tax on top, unless one of a listed set of exceptions applies, such as qualified higher education expenses for an IRA. A part that is a return of basis is not taxed, so it carries no additional tax either. Note the two ages do different jobs — 59 and a half is when the penalty stops, 73 is when withdrawal becomes compulsory.

Exam terms (6)
Traditional IRA
Contributions may be deductible; withdrawals are taxed as ordinary income.
Roth IRA
Contributions are after-tax; qualified withdrawals are free of federal tax.
Qualified withdrawal
A Roth distribution meeting the age and holding conditions, so it is untaxed.
Required minimum distribution
A compulsory annual withdrawal from a traditional account, beginning at age 73.
Contribution limit
The annual cap shared across all of a person’s IRAs; capped by taxable compensation.
Early withdrawal penalty
An additional 10 percent tax on the taxable part of money taken before age 59 and a half, unless an exception applies.

Traditional against Roth

Traditional IRARoth IRA
ContributionsMay be deductible nowAfter-tax, never deductible
GrowthNot taxed annuallyNot taxed annually
Qualified withdrawalTaxed as ordinary incomeFree of federal tax
Lifetime required distributionsYes, from age 73None for the original owner
Annual limit for 2026$7,500, or $8,600 from age 50Shared with the traditional limit
The same money, taxed at one end or the other.

Try it: Take two savers: one in a high tax bracket now who expects a much lower one in retirement, and one early in a career who expects to earn far more later. Decide which account suits each and write the single sentence of reasoning behind your choice. Then say what would change your answer for the second saver.

Check yourself

Try a question, then read the explanation to review the rule.

Opening your study record…

Worked example

A saver contributes the 2026 maximum to a Roth account and asks how the tax works at each stage, and what would have differed in a traditional account.

  1. The contribution is $7,500 for 2026, or $8,600 if the saver is 50 or older, and it cannot exceed taxable compensation for the year. That limit is shared: it is the total across every individual retirement account the person holds.
  2. The Roth contribution produces no deduction. Taxable income for the year is unchanged, so the tax is paid up front, on the way in.
  3. The account grows without annual tax. Dividends and gains inside it are not reported year by year, which is true of both account types.
  4. A qualified withdrawal in retirement is free of federal tax, growth included, and no lifetime required distribution ever forces the owner to take money out.
  5. A traditional contribution of the same amount would have reduced taxable income now, grown the same way, and been taxed as ordinary income on withdrawal, with required minimum distributions beginning at age 73.

Same rule, new context

Opening your study record…

The closest contrast

Traditional: tax later.

Roth: tax now.

This decides every recommendation question in the topic. Expecting a lower tax rate in retirement favors taking the deduction now; expecting a higher one favors paying the tax now and taking the withdrawal free later.

Summary

  • Traditional contributions may be deductible, and deductible contributions and earnings are taxed as ordinary income when withdrawn.
  • Roth contributions are after-tax and qualified withdrawals are free of federal tax.
  • Traditional accounts carry required minimum distributions from age 73; a Roth has none for the original owner.
  • The taxable part of money taken out before age 59 and a half carries an additional 10 percent tax unless an exception applies.
  • One annual limit is shared across all of a person’s IRAs and is capped by taxable compensation.

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Sources

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