Roth IRA vs Traditional IRA: The 2025 Guide
The IRS contribution limit for IRAs has risen to $7,000 for 2025 (and $8,000 if you're 50+). But sticking that money in the wrong account could cost you thousands in taxes later.
Should you pay taxes now (Roth) or later (Traditional)?
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The Difference
| Feature | Roth IRA | Traditional IRA |
|---|---|---|
| Tax Break | None now. Tax-Free withdrawals in retirement. | Tax deduction now. Taxable withdrawals later. |
| Withdrawals | Contributions can be withdrawn anytime penalty-free. | Penalty if withdrawn before age 59½. |
| Income Limit | Yes (You can't contribute if you earn too much). | No contribution limit, but deduction is limited. |
Why Roth Usually Wins
For most young professionals or those early in their careers: Roth is King.
- Tax-Free Growth: If you invest $7,000 today and it grows to $70,000 over 30 years, you pay $0 taxes on that $63,000 of profit.
- Emergency Fund Backup: Since you can withdraw your contributions (not earnings) anytime penalty-free, a Roth IRA doubles as a backup emergency fund.
When to Choose Traditional?
Choose Traditional if:
- You are in a very high tax bracket right now (e.g., 32% or higher) and expect to be in a much lower bracket when you retire.
- You need the upfront tax deduction to lower your AGI.
Strategy: If you earn too much for a Roth (>$161k single), look into the "Backdoor Roth IRA" strategy.