Traditional IRAs versus Roth IRAs

Workers and their spouses do not need to rely on their employers to save in tax-favored retirement accounts. They may open individual retirement accounts, which mostly come in two forms: traditional IRAs and Roth IRAs. [Other types of IRAs, such as SEP-IRAs and SIMPLE-IRAs, are only available through employers or for the self-employed.] The primary difference is the timing of any tax on contributions or distributions.

Qualified contributions to traditional IRAs are excluded from tax and grow tax-free, but withdrawals are taxed. Contributions to Roth IRAs, conversely, are taxed in the year they are made. But account assets grow tax-free, and withdrawals after age 59½ are not taxed. Even though statutory contribution limits are the same for both traditional and Roth IRAs, the effective amount a saver can place in tax-preferred status is higher with a Roth IRA because the saver is contributing post-tax income.

As of tax year 2020, almost 65 million taxpayers (or 30 percent) owned IRAs. About 50 million taxpayers (or 23 percent) held traditional IRAs, while nearly 23 million taxpayers (or 11 percent) held a Roth IRA. Some of these households owned both.

The Fine Print

These rules are a bit confusing. Taxpayers with income over a specified level, which varies with tax-filing status, may not contribute to a Roth IRA. Nor may taxpayers who participate (or whose spouses participate) in employer-provided pensions deduct traditional IRA contributions if their income exceeds a specified limit.

For single taxpayers without access to an employer-sponsored pension, and for married couples in which neither spouse participates in such a pension plan, there are no income restrictions on the deductibility of traditional IRA contributions. A married taxpayer who does not participate in an employer-sponsored plan, but whose spouse does, may contribute the maximum statutory amount to an IRA, provided the couple’s joint modified adjusted gross income does not exceed $218,000 for 2023.