Edgar Guerrero 
Traditional IRA vs Roth IRA: Understanding the Basics
When planning for retirement, choosing the right type of Individual Retirement Account (IRA) can significantly impact your long-term financial health. The two most popular options are the Traditional IRA and the Roth IRA. Both offer tax advantages, but they work in different ways, and understanding the differences is crucial for building a strategy that aligns with your income, tax bracket, and retirement goals.
Traditional IRA: Pros and Cons
A Traditional IRA allows you to contribute pre-tax income, which reduces your taxable income for the year. Taxes are deferred until you begin withdrawing the money in retirement.
Pros:
- Immediate tax deduction on contributions (if eligible)
- Contributions reduce current taxable income
- Anyone with earned income can contribute
- Potentially lower tax rate during retirement when withdrawals begin
Cons:
- Required Minimum Distributions (RMDs) begin at age 73
- Withdrawals are taxed as ordinary income
- Early withdrawal (before 59½) can trigger a 10% penalty
- No tax-free growth on withdrawals
Best For: People who expect to be in a lower tax bracket in retirement or who want an immediate tax break.
Roth IRA: Pros and Cons
A Roth IRA is funded with after-tax income. You won’t receive a tax deduction now, but your money grows tax-free, and qualified withdrawals are also tax-free.
Pros:
- Tax-free withdrawals in retirement
- No RMDs during the account holder’s lifetime
- Contributions (but not earnings) can be withdrawn at any time, penalty-free
- Ideal for young investors expecting to be in a higher tax bracket later
Cons:
- No immediate tax deduction
- Income limits may restrict who can contribute directly
- Contributions are made with after-tax dollars
Best For: Younger investors or those who expect to be in a higher tax bracket during retirement.
Side-by-Side Comparison
| Feature | Traditional IRA | Roth IRA |
|---|---|---|
| Tax Benefits | Deduct contributions | Tax-free withdrawals |
| Contribution Limit (2025) | $7,000 (50+ catch-up: $8,000) | $7,000 (50+ catch-up: $8,000) |
| Income Limit to Contribute | None | $153,000 (single) / $228,000 (married) |
| Tax on Withdrawals | Yes | No (if qualified) |
| Required Minimum Distributions | Yes (age 73) | No |
| Early Withdrawal Penalty | 10% + tax | 10% (earnings only) |
How Compounding Works: The Earlier You Start, The Better
Time is the most powerful ally in investing. Let’s look at two examples:
Investor A: Starts at 25
- Invests $6,000/year in a Roth IRA
- Average annual return: 7%
- Invests for 40 years (age 25 to 65)
- Total Contributions: $240,000
- Total at Retirement: ~$1.3 million
Investor B: Starts at 35
- Invests $6,000/year in a Roth IRA
- Average annual return: 7%
- Invests for 30 years (age 35 to 65)
- Total Contributions: $180,000
- Total at Retirement: ~$567,000
Takeaway: Waiting just 10 years cuts your total retirement savings by more than half, even though you invested less money overall. That’s the power of compound growth over time.
Catch-Up Strategies for Late Starters (35 and Older)
Starting later doesn’t mean you’re out of options. Here are smart ways to close the gap:
1. Max Out 401(k) Contributions
In 2025, you can contribute up to $23,000 to your 401(k) if you’re over 50. Take advantage of employer matches, which are essentially free money.
2. Use Both a Roth IRA and a Traditional 401(k)
Diversifying your tax exposure in retirement can give you flexibility. Use Roth IRAs for tax-free withdrawals and Traditional 401(k)s for the upfront tax breaks.
3. Invest in a Taxable Brokerage Account
No contribution limits and more flexibility. Focus on low-fee index funds, ETFs, or dividend-paying stocks to build passive income streams.
4. Build Other Passive Income
- Rental properties
- REITs (Real Estate Investment Trusts)
- Side hustles turned automated businesses
The key is to generate income that grows without needing constant time or effort.
5. Reassess Your Spending and Save Aggressively
If you’re behind, redirect unnecessary expenses. Budgeting tools like YNAB or Mint can help you identify “money leaks” and redirect them toward investing.
There’s No One-Size-Fits-All IRA
Both Traditional and Roth IRAs offer valuable benefits—your best option depends on your current tax situation and future income expectations. Starting early gives you a massive advantage due to compound growth, but even if you’re getting a late start, there are still ways to build a solid retirement strategy.
Don’t wait for the “perfect” moment to invest. Whether you’re 25 or 45, the best time to take control of your financial future is right now.
Want to run your own numbers? Use a free IRA calculator to see how compounding could work for you.
See Also: The Rule of 55 for Retirement: A Tool for Early Freedom or a Risky Shortcut?
Jared Mason 
Andre Palome 
Jamaal Robison 
Derek Kersey