With a Guideline IRA, you have the flexibility to contribute to a traditional or Roth IRA, or even both. Each IRA type offers tax advantages, but they differ in when and how contributions and withdrawals are taxed. Here’s the difference between the two contribution types to help you determine which IRA type is right for you.
Traditional IRA contributions
Traditional IRA contributions may be tax-deductible, which means they can reduce your taxable income for the year you make the contribution. However, this deductibility may be limited if you or your spouse is covered by a retirement plan at work, as well as your gross income for that tax year. When the traditional IRA contribution is tax deductible, you pay income tax on the contributions and earnings when distributed. If the contribution was not deductible, only the earnings will be taxed upon distribution.
Roth IRA contributions
Roth IRA contributions are made with after-tax dollars, meaning the taxable compensation used to make the contribution is included in your taxable income for that year. However, qualified withdrawals from a Roth IRA are tax-free.¹ Your ability to make Roth IRA contributions depends on whether you meet the modified adjusted gross income limits (MAGI) for that tax year.
Key differences and similarities
Here's a chart that highlights the key differences and similarities between traditional and Roth IRA contributions:
Feature | Traditional IRA | Roth IRA |
Tax treatment of contributions | May be tax-deductible. | Not tax-deductible. |
Tax treatment of contribution and earning withdrawals | Deductible contributions and all earnings are taxable as ordinary income when withdrawn. | Contributions are not taxable. Earnings are taxable unless the distribution meets the definition of a qualified withdrawal.1 |
Income limits | Deductibility of contributions may be limited by income if you or your spouse is covered by a retirement plan at work. | Contribution eligibility is limited by income. |
Contribution limits (across all traditional and Roth IRAs) | The contribution limit is $7,000 for 2025 and an additional $1,000 if you're age 50 or older. Note that there are income requirements to deduct the traditional IRA contribution. | The contribution limit is $7,000 for 2025 and an additional $1,000 if you're age 50 or older. Note that there are income requirements to make a Roth IRA contribution. |
Required Minimum Distributions (RMDs) | Yes. Find more information on RMDs from traditional IRAs here. | No, Roth IRA accounts are not subject to RMDs. |
How to determine which IRA contribution type might be right for you
When considering whether to contribute to a traditional or Roth IRA, here are some factors to keep in mind:
Current vs. future tax rates: If you anticipate being in a higher tax bracket during retirement than you are now, a Roth IRA might be beneficial due to tax-free withdrawals. If you expect to be in a lower tax bracket during retirement, a traditional IRA may be advantageous due to the potential for tax-deductible contributions now.
Income limits: Both traditional and Roth IRAs have income limitations that can affect contribution deductibility or eligibility. If your income exceeds the limits for Roth IRA contributions, you may not be eligible to contribute. Similarly, the deductibility of traditional IRA contributions may be limited based on your income and whether you or your spouse is covered by a retirement plan at work.
RMDs: Traditional IRAs require you to take Required Minimum Distributions (RMDs) starting at a certain age. Roth IRAs are not subject to RMDs during the account owner's lifetime. This can be a consideration if you plan to leave tax-free retirement savings to beneficiaries or want more flexibility with withdrawals in retirement.
Immediate tax benefits: If you qualify for a tax deduction on traditional IRA contributions, it can reduce your current tax liability. Roth IRA contributions do not offer this immediate tax benefit.
Access both traditional and Roth contributions with Guideline
When you open an IRA with Guideline, you automatically gain access to contribute to both traditional and Roth IRAs. This flexibility allows you to choose the type of IRA that best fits your current financial situation and retirement goals.
For informational purposes only. This should not be considered financial, tax, or legal advice. Contact a financial professional to evaluate what retirement plan is best suited for your situation.
¹ Roth distributions will be tax-free if the following conditions are met: (a) you're over age 59 1/2 AND (b) it has been 5 years since your first deposit. Please consult a qualified financial advisor or tax professional to determine what is applicable to your financial situation.