Articles · Basics · Individual Income Tax and Form 1040
Traditional IRA vs. Roth IRA
Both IRAs help savings grow without annual tax on earnings. The main difference is when the tax is paid.
Traditional IRA
Contributions may be deductible, depending on income and whether the taxpayer has a workplace plan. Withdrawals of deductible contributions and earnings are taxed as ordinary income. Required minimum distributions begin at a set age.
Roth IRA
Contributions are not deductible, and the ability to contribute phases out at higher incomes. Qualified withdrawals are tax-free, generally after age 59½ and once a five-year period has passed. Original owners do not take required minimum distributions.
Regular contributions can be withdrawn at any time without tax, because they were made with after-tax money.
Which one fits
A traditional IRA tends to suit someone who expects a lower rate in retirement. A Roth tends to suit someone who expects a higher rate later, or who values tax-free flexibility.
Early withdrawals of taxable amounts usually carry a 10% additional tax under Section 72(t), unless an exception applies. Annual contribution limits are shared across both IRA types.
Contribution rules for both accounts
To contribute, a taxpayer needs earned income or a spouse with earned income. Contributions for a tax year can generally be made up to the regular filing deadline, usually April 15 of the next year, without extensions. Annual limits are adjusted for inflation, and people aged 50 or older can make a catch-up contribution.
Contributing too much triggers a 6% excise tax each year the excess stays in the account. It can usually be corrected by withdrawing the excess and its earnings before the extended due date of the return.
Roth conversions and the pro rata rule
A Roth conversion moves money from a traditional IRA to a Roth IRA. The pre-tax amount converted is taxed as ordinary income, but no income limit applies and there is no 10% penalty on the conversion itself. Conversions can make sense in a low-income year.
A backdoor Roth is a nondeductible traditional IRA contribution followed by a conversion, used by people above the Roth income limit. The pro rata rule applies across all traditional, SEP, and SIMPLE IRAs. If 90% of a taxpayer's combined IRA balance is pre-tax, then 90% of any conversion is taxable. Form 8606 tracks nondeductible basis, so it must be filed accurately.
The two five-year rules
One five-year period applies to Roth earnings. It starts on January 1 of the year for which the first Roth IRA contribution was made. Earnings are tax-free only after that period and after a qualifying event, such as reaching age 59½.
A separate five-year period applies to each conversion for the 10% additional tax. Withdrawing converted amounts too soon can trigger the additional tax if the owner is under 59½.
Required distributions and heirs
Traditional IRA owners must begin required minimum distributions at age 73, rising to 75 for people who reach that age in 2033 or later. Missing a distribution can trigger an excise tax of up to 25%, which may be reduced if corrected promptly. Roth IRA owners have no required distributions during their lifetime.
Most non-spouse beneficiaries must empty an inherited IRA within ten years. Traditional IRA withdrawals are generally taxable to them, while qualified Roth withdrawals are not. This can make a Roth a strong asset to leave to heirs.
A preparer's checklist
Confirm that the taxpayer has earned income, and that total contributions across all IRAs stay within the annual limit. Then check modified AGI against the Roth phase-out range, and the deduction phase-out if the taxpayer or spouse has a workplace plan.
Compare Form 5498 and Form 1099-R with the return, and review any distribution code. Rollovers and conversions should appear on the return even when little or no tax is due. Update Form 8606 for any nondeductible contribution, conversion, or Roth distribution.
If there has been a conversion, list all year-end traditional, SEP, and SIMPLE IRA balances to apply the pro rata rule. Record the start of each five-year period, and check that any required minimum distribution for the year was actually taken.
Key takeaways
- Traditional accounts often give the tax benefit now.
- Roth accounts give the tax benefit later.
- The contribution limit is shared across both types.
Frequently asked questions
Can I have both a traditional and a Roth IRA?
Yes. You can contribute to both in one year, as long as your combined contributions stay within the annual limit.
Can I contribute to an IRA if I have a 401(k)?
Yes. A workplace plan can limit the deduction for a traditional IRA contribution, and income limits apply to Roth contributions, but the plan does not stop you contributing.
Is a Roth conversion reversible?
No. Since 2018, a Roth conversion cannot be recharacterized back to a traditional IRA.
For general education only, not tax advice. Tax law changes often, so confirm current rules and amounts with primary sources.