Traditional vs. Roth IRA

Individual Retirement Accounts (IRAs) have been a cornerstone of retirement planning for millions of Americans. As of 2025, Traditional IRAs, created in 1974, are owned by approximately 36.1 million U.S. households. Roth IRAs, introduced in 1997 under the Taxpayer Relief Act, are held by nearly 24.9 million households.

While both types of IRAs offer valuable retirement savings options, they differ significantly in terms of tax benefits and distribution rules.

Traditional IRAs

Traditional IRAs allow individuals to make tax-deductible contributions up to certain limits. These contributions can reduce your taxable income for the year they are made. However, distributions from traditional IRAs are taxed as ordinary income. If you withdraw funds before age 59½, you may incur a 10% federal income tax penalty. Starting at age 73, you must begin taking required minimum distributions (RMDs).

Roth IRAs

Contributions to Roth IRAs are made with after-tax dollars, meaning they are not tax-deductible. The major advantage of Roth IRAs is that distributions are tax-free during retirement, provided certain conditions are met. Unlike traditional IRAs, Roth IRAs do not require RMDs during the account holder’s lifetime.

Contribution Limits for 2025

For 2025, the annual contribution limit for IRAs remains $7,000 for individuals under age 50 and $8,000 for those aged 50 and above. These limits apply to both traditional and Roth IRAs.

Tax Implications

Understanding the tax implications of IRA distributions is crucial for effective retirement planning. Traditional IRA withdrawals are taxed as ordinary income, while Roth IRA withdrawals are generally tax-free, provided they meet the criteria for qualified distributions.

Required Minimum Distributions

Starting at age 73, traditional IRA holders must begin taking RMDs. The first RMD must be taken by April 1 of the year following the year you turn 73. Roth IRAs do not have RMDs during the account holder’s lifetime, making them a flexible option for retirement planning.

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