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These two types of accounts are often key components of individual and family retirement plans, but their eligibility rules, usage restrictions, and access limitations must be carefully evaluated to determine their role in an overall financial strategy. Outside of the tax now or tax later decision discussed in this previous article, there are several other advantages and disadvantages between these two account types. You may be ineligible for one or the other in a given year, the flexibility of one may be worth more to you than someone else, or your decision to use these accounts as part of your estate planning may sway you to putting your contributions in one account or the other.
Even understanding all of the considerations below, weighing the importance of these pros and cons in your plan might require making some educated guesses and some complicated calculations. As always, we suggest consulting with your qualified tax advisor, CPA, financial planner, or investment manager to help answer questions about specific situations or your needs prior to taking any action based upon this information.
Eligibility to Contribute
- Roth IRA: Contributions are limited by your income. If your earned income is above certain thresholds, you may not be able to contribute the full amount (or at all).
- Traditional IRA: Anyone with earned income can contribute. However, if you or your spouse are covered by an employer-sponsored retirement plan, the ability to deduct contributions on your taxes may be limited by income.
Age Restrictions for Contributions
There are no age limits for contributing to either Roth or Traditional IRAs. You can continue contributing as long as you have earned income, which is different from some older rules that restricted contributions past a certain age.
Maximum Contribution (2024/2025)
Both Roth and Traditional IRAs allow you to contribute up to $7,000 per year, or $8,000 if you are age 50 or older. This “catch-up” contribution is designed to help those closer to retirement save a bit more. You can split that allowance between the two accounts if you wish, but your combined contributions to both a Traditional or ROTH account in one tax year cannot be higher than $7k (or $8k if you are 50 or older).
Taxes and Penalties for Withdrawals
- Roth IRA: You can withdraw your contributions (the money you put in) anytime without taxes or penalties (not including contributions through a Traditional to ROTH IRA conversion). Earnings on those contributions can be withdrawn tax- and penalty-free once you are at least 59½ and have held the account for at least 5 years. This combination of age and holding period is called the “5-year rule.”
- Traditional IRA: Withdrawals are taxed as ordinary income because contributions were often made pre-tax. Penalties for early withdrawals generally apply if you take money out before age 59½, though there are some exceptions (like first-time home purchase or certain medical expenses).
Availability and flexibility of investments makes a significant part of the consideration for choosing one financial path over another. ROTH contributions being available at any time without penalty might be enough to make the decision for someone choosing how to allocate a nest egg. Another individual may be planning on exceptions in the near future that would allow for distributions without penalties from either account. An individual with a wide moat in their cash flow may not find these considerations as important as the tax impact or estate planning when deciding to go Traditional or ROTH IRA. Every situation is different and no one answer is correct for everyone.
| Type of Withdrawal | Income Tax Owed | 10% Early-Withdrawal Penalty |
| Traditional IRA (all withdrawals- contributions and earnings) | Ordinary Income Tax on everything | No (after age 59½)Yes (before age 59½)* |
| Roth IRA – Contributions | No | No |
| Roth IRA – Earnings (qualified)Owner 59 ½ | No (5-year rule met)Yes (5-year rule not met) | No |
| Roth IRA-EarningsOwner under 59 ½ | Yes* | Yes* |
*There are some exceptions (like first-time home purchase or certain medical expenses) that can help account owners to avoid these withdrawal penalties, or even in some cases, the taxes.
Some possible exceptions to the penalties, and in a few rare cases, even the taxes on certain IRA withdrawals.
If you are subject to penalties or taxes on a distribution according to the chart above and if any of the below conditions or situations may apply to you, please reach out to your qualified tax advisor, CPA, financial planner, or investment manager to see if an IRA distribution penalty exemption may apply.
- If you become disabled.
- If you pass away (your beneficiaries can withdraw without penalty).
- Qualified birth or adoption expenses, up to $5,000 per birth or adoption.
- If you are a survivor of domestic abuse.
- A first-time home purchase, up to a $10,000 lifetime limit.
- Qualified higher-education expenses for yourself, your spouse, children, or grandchildren.
- Unreimbursed medical expenses that exceed 7.5% of your adjusted gross income.
- Health-insurance premiums while unemployed and receiving unemployment compensation.
- Certain emergency expenses allowed under the SECURE 2.0 Act. Please review specific restrictions on this action.
- Federally declared disaster distributions.
- A withdrawal made due to an IRS levy on the IRA.
- Substantially Equal Periodic Payments (SEPPs)—a series of regular withdrawals set up under IRS rules.
- Qualified reservist distributions – Members of the National Guard or military reserves can withdraw IRA funds penalty-free if called to active duty for at least 180 days (or for an indefinite period). Certain restrictions apply.
Required Minimum Distributions (RMDs)
RMDs are mandatory withdrawals you must take each year from certain types of retirement accounts once you reach a specific age set by law. This can apply to Traditional IRAs, SEP IRAs, SIMPLE IRAs, and most employer-sponsored retirement plans such as 401(k)s and 403(b)s. RMDs do not apply to ROTH IRAs during the original owner’s lifetime.
The purpose of these rules is to ensure that tax-deferred retirement accounts eventually get taxed, by requiring you to withdraw—and pay income tax on—a minimum amount each year once you reach the specified age.
Traditional IRAs require minimum distributions starting at age 73, Roth IRAs do not have required minimum distributions, providing more flexibility in retirement planning. Roth IRA: There are no RMDs during the account owner’s lifetime. This allows your money to grow tax-free for as long as you want, which can be helpful for estate planning.
- Traditional IRA: RMDs are required starting at age 73 (as of current law, however, for individuals born in 1960 or later, the starting age for RMDs will increase to 75.). This means you must begin withdrawing a certain minimum amount each year, even if you don’t need the money, and those withdrawals are taxed as ordinary income.
For most people, RMDs must begin by April 1 of the year after you reach the required starting age. That starting age keeps shifting so speak with your CPA or qualified tax advisor to confirm when this may be applicable to you. As of now, starting ages may be::
- 72 for those who turned 72 before 2023,
- 73 for those turning 72 after 2022,
- Scheduled to rise to 75 for those turning 74 after 2032 (per SECURE 2.0 Act).
RMDs are calculated according to the life expectancy table provided by the IRS. Your RMD is calculated based on the balance on December 31 of the previous year of all owned (not-inherited) IRAs an individual has. That total is then divided by the life expectancy factor from the IRS table to tell you the minimum required amount you must withdraw from your IRAs this year.
(Total of all IRA balances on Dec 31, 2024) = RMD in 2025
(IRS Life Expectancy Factor)
If you miss your RMD, an excise tax of up to 50% on the amount that should have been withdrawn can be assessed by the IRS. (This penalty should have been reduced by the SECURE ACT 2.0 to 25% or even 10% if corrected quickly.)
Inheritance and Estate Planning for IRAs
When it comes to inheritance planning, Traditional IRAs and Roth IRAs have different implications for beneficiaries. With a Traditional IRA, heirs must pay ordinary income taxes on withdrawals, which can result in a significant tax liability. In contrast, a Roth IRA allows beneficiaries to withdraw funds tax-free, making it a possibly more efficient vehicle for transferring wealth and preserving the value of your estate.
Beyond this, limitations and requirements are placed on individuals who inherit IRAs depending on account type, relationship to the original owner, age of the beneficiary, age of the original owner, date of inheritance, or even whether the inheritor is an individual or entity/organization. This further complicates the choice between funding the two different accounts and makes planning even more important for the purpose of minimizing taxes for your heirs and maximizing the impact of your legacy.
In short, Roth IRAs can be more favorable for heirs because they allow beneficiaries to inherit assets without incurring income taxes, while Traditional IRAs can create taxable events for heirs. This must be weighed with the cost and impact of these assets and account actions to you in your lifetime. Many factors may mean it is more or less favorable for you to pay the taxes now or it may be better to leave that to your estate and heirs. Every situation is different and many many variables need to be considered. No one answer should be accepted for everyone.
Quick Wrap-Up
Hopefully this provided a more complete concept of the pros and cons of these two very important accounts. Unfortunately, I cannot give a blanket recommendation or provide concrete suggestions to everyone. Tax impact is a huge part of this equation, but eligibility, exceptions, penalties, liquidity, RMD restrictions, and estate planning all need to be evaluated based on an individual’s particular financial situation. As always, please reach out to your qualified tax advisor, CPA, financial planner, or investment manager to seek specific suggestions or evaluation and develop your own personal plan.
Withdrawal rules, penalties, and distribution requirements vary depending on the type of account. It is important to understand these provisions before opening a specific account. Tax laws may change at any time, with effects that may be prospective or retroactive. Please consult with your legal counsel and tax advisor about your particular circumstances.The policy analysis provided by Creed Evans Financial does not constitute, and should not be interpreted as, an endorsement of any political party. Relying on any one or any combination of investment strategies or methods of analysis does not ensure a profit and does not protect against losses in declining markets.