Roth IRA vs. Traditional IRA: Which One Saves More on Taxes?

Introduction

Individual Retirement Accounts (IRAs) offer a great way to save for retirement while reducing your tax burden. The two main types—Roth IRA and Traditional IRA—offer different tax advantages, but choosing the right one depends on your income, tax bracket, and retirement goals.

This guide will break down the key tax differences, contribution limits, withdrawal rules, and strategies for maximizing tax savings with IRAs in 2025.

Understanding the Tax Differences Between Roth and Traditional IRAs

The biggest difference between a Roth IRA and a Traditional IRA is when you pay taxes:

• Traditional IRA (Pre-Tax Contributions, Tax-Deferred Growth)
  • Contributions are tax-deductible now (reduce taxable income in the contribution year).
  • Taxes are paid later when you withdraw funds in retirement.
  • Required Minimum Distributions (RMDs) apply starting at age 73 (IRC § 401(a)(9)).
• Roth IRA (After-Tax Contributions, Tax-Free Growth)
  • Contributions are not tax-deductible (you pay taxes upfront).
  • Withdrawals in retirement are tax-free, including earnings.
  • No Required Minimum Distributions (RMDs) during your lifetime.

Example: Roth vs. Traditional IRA in Action

• John (Traditional IRA): Contributes $6,500 per year, reduces taxable income, but will owe taxes on withdrawals in retirement.
• Sarah (Roth IRA): Pays taxes now, but her investments grow tax-free, and she won’t owe taxes on qualified withdrawals.

Contribution Limits & Income Eligibility for 2025 (IRC § 219)

Traditional IRA Deduction Phase-Out Limits (2025)

If you (or your spouse) are covered by a workplace retirement plan, the deduction for Traditional IRA contributions phases out at:

• Single Filers & Head of Household: $77,000 – $87,000 MAGI
• Married Filing Jointly: $123,000 – $143,000 MAGI

Roth IRA Income Limits (2025) for Contributions

• Single Filers: Phase-out begins at $146,000 and ineligible at $161,000.
• Married Filing Jointly: Phase-out begins at $230,000, and ineligible at $240,000.

Tip: If you earn too much for a Roth IRA, consider a Backdoor Roth IRA strategy (explained below).

Tax Benefits of Roth vs. Traditional IRAs

3.1. Traditional IRA: Tax Deduction Today, Taxes Later

• Reduces taxable income in the year of contribution.
• Ideal if you expect to be in a lower tax bracket in retirement.
• Example: Contributing $7,000 could save $1,540 in taxes if you’re in the 22% tax bracket.

3.2. Roth IRA: Pay Taxes Now, No Taxes in Retirement

• Tax-free withdrawals in retirement, including investment earnings.
• No RMDs, making it ideal for legacy planning.
• Example: A $500,000 Roth IRA balance can be withdrawn tax-free in retirement.

Required Minimum Distributions (RMDs) & Early Withdrawal Rules

4.1. Roth IRA Five-Year Rule (IRC § 408A)

To make tax-free withdrawals, you must:

• Have held the Roth IRA for at least five years.
• Be 59½ or older when withdrawing earnings.

4.2. Traditional IRA Early Withdrawals

• Withdrawals before age 59½ face a 10% penalty + regular income tax.
• Exception: Can withdraw $10,000 penalty-free for a first-time home purchase (IRC § 72(t)).

Advanced IRA Tax Strategies

5.1. Roth Conversion Ladder (Traditional IRA to Roth IRA Conversions, IRC § 408A)

• Convert a portion of a Traditional IRA to a Roth IRA each year.
• Pay taxes now, but all future withdrawals will be tax-free.
• Ideal for early retirees or those expecting higher taxes in the future.

Example: Converting $10,000 per year at a 12% tax rate results in $1,200 in upfront taxes, but all future withdrawals are tax-free.

5.2. Backdoor Roth IRA for High Earners

If you exceed Roth IRA income limits, you can:

1. Contribute to a Traditional IRA (no income limit).
2. Convert to a Roth IRA (paying taxes on pre-tax amounts).
3. Future withdrawals grow tax-free.

5.3. Spousal IRA (For Non-Working Spouses, IRC § 219)

• A non-working spouse can contribute to an IRA based on the earning spouse’s income.
• Max contribution: $7,000 ($8,000 if 50+ years old).

6. Common IRA Tax Mistakes to Avoid

• Withdrawing from a Traditional IRA before 59½ – Triggers a 10% penalty + income tax.
• Ignoring RMDs on Traditional IRAs – 50% penalty on missed distributions.
• Not using a Roth conversion strategy – Could miss out on future tax-free growth.

Conclusion

Choosing between a Roth IRA and a Traditional IRA depends on your current and future tax situation. A Traditional IRA helps lower taxable income today, while a Roth IRA offers tax-free withdrawals in retirement. High-income earners can use Backdoor Roth IRAs, and strategic Roth conversions can further maximize tax-free retirement income.

To develop a personalized IRA tax strategy, schedule a consultation with Anshul Goyal, CPA EA FCA for expert guidance. Book an appointment here:

About Our CPA

Anshul Goyal, CPA EA FCA is a licensed Certified Public Accountant (CPA) in the United States, an Enrolled Agent (EA) admitted to practice before the IRS, and a cross-border tax expert. He specializes in IRS compliance, tax litigation, and assisting American businesses and Indian expatriates in managing U.S. tax obligations.

Frequently Asked Questions (FAQs)

1. Which IRA is better for tax savings: Roth or Traditional?
If you want tax savings now, choose Traditional IRA. If you want tax-free retirement income, choose Roth IRA.

2. Can I contribute to both a Roth and a Traditional IRA?
Yes, but the total contributions cannot exceed $7,000 ($8,000 if 50+ years old).

3. Do Roth IRAs have income limits?
Yes, single filers earning over $161,000 and married filers over $240,000 cannot contribute directly.

4. How can high earners contribute to a Roth IRA?
Use a Backdoor Roth IRA conversion.

5. What happens if I miss an RMD?
A 50% penalty applies to the missed amount.