Traditional vs Roth IRA: Key Differences

By Brent Meyer — SafeMoney.com Founder & Editor Reviewed by Licensed Financial Professionals  |  SafeMoney.com — Trusted Since 2011  |  Updated Regularly Quick Answer: Discover the key differences between Traditional and Roth IRAs to optimize your retirement savings. Learn more at SafeMoney.com. There are many types of IRAs. But two of the most common are the traditional IRA and the Roth IRA. The type of account you select can have a significant impact on your long-term household savings . The biggest difference between a traditional IRA and Roth IRA is their classifications in the IRS tax code. A traditional IRA holds the benefit of tax deferral, which means that money going into it has pre-tax status. On the other hand, since a Roth IRA is funded with after-tax dollars, it gives the benefit of potentially tax-free distributions. On top of these differences, both types of accounts have different rules for required minimum distributions . Because of this difference and others, it’s important to understand the fundamentals behind these two plans. This brief discussion will help you understand their distinctions, their eligibility criteria, and other important factors. Let’s get into it. Other Important Differences Between Traditional and Roth IRAs Apart from distinctions in the tax code, traditional and Roth IRAs have some other differences. Here’s a quick overview of them: Income Limitations  People can open a traditional IRA and make contributions toward it if they received taxable compensation. Generally, compensation refers to wages, salaries, commissions, tips, professional fees, and other forms of earned income. Further discussion of what the IRS defines as “compensation” can be found here . Whether these contributions are tax-deductible will depend on the amount of income you earned and whether you, or your spouse, are covered by a workplace retirement plan. Should your income exceed certain amounts, and one of you does have a retirement plan at work, your contributions may be limited. On the other hand, if neither of you is covered by a workplace retirement plan, you are permitted full deductions. You can learn more about the income limits of traditional IRAs here . On the other hand, Roth IRAs come with no age restrictions. However, there are certain restrictions in terms of income. If you are a single tax filer interested in contributing to a Roth IRA, your modified adjusted gross earnings in 2020 must