Traditional and Roth IRAs

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taxable income in the year it is made, the account grows without annual tax, and deductible contributions and earnings withdrawn later are taxed as ordinary income.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.

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

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.

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.

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Related practice

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