Key takeaways

  • Traditional and Roth accounts differ primarily in when taxes are paid. Traditional accounts are funded with pre-tax dollars, grow on a tax-deferred basis, and are taxed at withdrawal. Roth accounts are funded with after-tax dollars, grow tax-free, and produce tax-free qualified withdrawals. The IRS describes this as the distinction between tax-deferred and tax-free growth.
  • Traditional IRA deductions phase out gradually for workers covered by a workplace retirement plan. For 2026, single filers covered by a workplace plan may fully deduct contributions if their modified adjusted gross income (defined later) is $81,000 or below, with the deduction phasing out gradually and disappearing entirely at $91,000, per the IRS.
  • Direct Roth IRA contributions are restricted above certain income thresholds. In 2026, single filers with modified adjusted gross income above $168,000 and married couples filing jointly above $252,000 may not contribute directly to a Roth IRA, per the IRS. High earners above these thresholds may use the backdoor Roth strategy instead.
  • Traditional IRAs require mandatory withdrawals beginning at age 73. Roth IRAs do not, during the original owner’s lifetime. Required minimum distributions from traditional IRAs are taxed as ordinary income. Non-spouse beneficiaries who inherit a Roth IRA are generally subject to distribution rules, per IRS Publication 590-B.
  • Both account types share the same annual contribution limit. For 2026, the base limit across all traditional and Roth IRAs is $7,500. Account holders aged 50 and older may make an additional $1,100 catch-up contribution, bringing their total to $8,600, per IRS Notice 2025-67.

Every dollar saved for retirement eventually faces a tax bill. The question is not whether taxes will be paid, but when. That single distinction, tax now or tax later, is the engine behind the traditional versus Roth debate, and understanding it in practical terms is one of the most useful pieces of financial literacy a retirement saver can acquire.

The IRS offers both account types across a range of retirement vehicles: individual retirement accounts, employer-sponsored 401(k) plans, 403(b) plans, and others. Each carries the same fundamental tax architecture. The differences in rules, limits, and income thresholds determine who can access which option and on what terms.

Tax treatment at contribution

A traditional IRA accepts contributions made with pre-tax dollars, meaning the contributed amount is deducted from taxable income in the year the contribution is made, subject to the income and coverage rules described below. The account then grows on a tax-deferred basis. No annual taxes apply to dividends, interest, or capital gains inside the account. The tax bill arrives at withdrawal, when distributions are included in the account holder’s ordinary income for that year.

A Roth IRA works in the opposite sequence. Contributions are made with after-tax dollars and are never deductible. The account grows on a tax-free basis. Qualified distributions are those taken after age 59½ from an account that has satisfied the five-year holding requirement. They are entirely free of income tax, including all accumulated earnings, per IRS Publication 590-B.

The same architecture applies to employer-sponsored accounts. A traditional 401(k) accepts pre-tax contributions that reduce current-year taxable income, with taxes deferred until withdrawal. A Roth 401(k) accepts after-tax contributions with tax-free qualified withdrawals and is not subject to income limits for contributions. 

The new 2026 Roth catch-up rule, explained

Beginning in 2026, the IRS (via Notice 2025-67) changed the tax rules for older savers who want to maximize their retirement accounts. If the account holder is 50 or older and chooses to utilize catch-up contributions, their options depend entirely on their prior-year income:

  • $150,000 or less (in FICA wages): The account holder retains total flexibility. They can choose whether their optional catch-up contributions are pre-tax, Roth, or a mix of both.
  • More than $150,000: Their standard contributions (up to the base limit) can still be pre-tax to lower their current tax bill. However, if they decide to contribute anything extra under the catch-up rules, those additional funds must be designated as post-tax Roth contributions.

High-income employees are never required to make catch-up contributions. The new rule does not force anyone to save more money. Instead, it simply states that if an eligible high-income employee chooses to make catch-up contributions, they can no longer do so using pre-tax dollars; they must use post-tax (Roth) dollars.

If an account holder does choose to make catch-up contributions in 2026, the maximum amounts they are allowed to add above the base limit are:

  • Ages 50 to 59 (and 64+): An additional $8,000.
  • Ages 60 to 63 (“Super” Catch-Up): An enhanced limit of $11,250 under SECURE 2.0.

For high-income earners to make these optional contributions, the employer’s plan must officially offer a Roth option. If the plan does not support Roth accounts, no high-income participants will be permitted to make any catch-up contributions at all.

Choosing between tax-now & tax-later 

The practical implication of the tax-now versus tax-later choice depends on a comparison between the account holder’s current marginal tax rate and their expected rate in retirement. When the current rate is higher, deferring taxes through a traditional account may produce a better outcome. When the expected retirement rate is higher, as may be the case for younger workers or those with significant non-retirement income in later years, paying taxes now through a Roth account may be advantageous. We’ll describe the mechanics of each option. However, we won’t assess which produces a better result in any individual case because that depends on facts that vary by household.

Put it into practice: Use our Roth vs. Traditional Retirement Calculator to compare estimated after-tax values.

Go Further: The backdoor Roth IRA is a two-step strategy available to high earners who exceed the income thresholds for direct Roth contributions. A nondeductible contribution is first made to a traditional IRA, then converted to a Roth IRA. Because there is no income limit on Roth conversions, this sequence is available regardless of earnings. One important complication is the pro-rata rule: if the account holder holds other pre-tax IRA funds, a portion of the conversion will be taxable, calculated as the ratio of pre-tax funds to total IRA funds across all traditional IRAs combined. The mechanics are covered in detail in the companion article “What is a Roth conversion? A beginner’s guide.”

Tax treatment at withdrawal

The tax consequence of each withdrawal depends entirely on which account type it comes from and whether the distribution qualifies under IRS rules.

Withdrawals from a traditional IRA or traditional 401(k) are taxable as ordinary income in the year they are taken. Every dollar comes out at the account holder’s then-current marginal rate. Early withdrawals taken before age 59½ are also subject to a 10 percent additional tax unless a specific exception applies, per the IRS Retirement Topics page on exceptions to early distribution tax. Commonly applicable exceptions include:

  • Permanent disability
  • Unreimbursed medical expenses exceeding a specified percentage of adjusted gross income
  • Health insurance premiums paid while unemployed following job loss
  • Qualified higher education expenses
  • A first-time home purchase, up to a $10,000 lifetime limit

Qualified distributions from a Roth IRA are not subject to income tax. The account must have been open for at least five years and the distribution must occur after the account holder reaches age 59½, or upon death, disability, or a qualifying first-time home purchase up to applicable limits. Non-qualified distributions may be subject to income tax and the 10 percent early withdrawal penalty on the earnings portion, per IRS Publication 590-B.

A related distinction concerns required minimum distributions, or RMDs. Traditional IRA owners must begin taking RMDs by April 1 of the year following the year they turn 73, with the annual amount calculated by dividing the prior December 31 account balance by an IRS life expectancy factor. Each distribution counts as ordinary income. Roth IRA owners face no lifetime RMD requirement, per IRS Publication 590-B. The account may remain untouched for as long as the owner lives. However, non-spouse beneficiaries who inherit a Roth IRA are generally subject to distribution rules including the 10-year rule under the SECURE Act. This surprises many readers who assume the Roth’s RMD-free status transfers fully to heirs. Beginning in 2024, designated Roth accounts in 401(k) and 403(b) plans are also exempt from pre-death RMDs under the SECURE 2.0 Act.

The five-year rule

The five-year rule governing Roth IRAs is not a single rule. It is two distinct rules that operate independently and can trip up even careful planners if they are not understood separately.

The first is the earnings rule. Before any earnings in a Roth IRA can be withdrawn tax-free, the account must have been in existence for at least five years. The clock starts on January 1 of the tax year in which the first contribution to any Roth IRA was made. A contribution made at any point during 2022, for example, starts the clock on January 1, 2022, and the five-year requirement is satisfied as of January 1, 2027. This clock applies once across all of a taxpayer’s Roth IRAs and does not reset when a new account is opened.

The second is the conversion rule. Each Roth conversion carries its own separate five-year clock, starting January 1 of the tax year in which that specific conversion was made. If converted funds are withdrawn within five years of that conversion and the account holder is under age 59½, a 10 percent early withdrawal penalty applies to the converted amount, even if the Roth IRA itself is older than five years and even though the taxes were already paid at the time of conversion. This rule is particularly relevant for anyone who has completed a backdoor Roth or converted a traditional IRA at any point.

Both rules are grounded in IRS Publication 590-B. Understanding which clock governs which type of distribution is essential before taking any early withdrawal from a Roth account.

Income eligibility limits

Traditional and Roth IRAs carry different income-based restrictions, and understanding each independently prevents common planning errors.

Traditional IRA contributions are not restricted by income. Any individual with earned income may contribute up to the annual limit regardless of how much they earn. However, the ability to deduct that contribution on a federal tax return phases out gradually for workers who are covered by a workplace retirement plan. For 2026, the deductibility phase-out ranges are as follows, per the IRS newsroom:

  • Single filers covered by a workplace plan: may fully deduct contributions if modified adjusted gross income, or MAGI, is $81,000 or below, with the deduction phasing out gradually and disappearing entirely at $91,000
  • Married filing jointly, covered spouse: full deduction available up to $129,000, phasing out completely at $149,000
  • Married filing jointly, non-covered spouse whose partner is covered: full deduction available up to $242,000, phasing out completely at $252,000

Modified adjusted gross income (MAGI) is the income measure used by the IRS to determine eligibility for traditional IRA deductions and direct Roth IRA contributions. MAGI is calculated by taking adjusted gross income and adding back certain deductions, as specified in IRS Publication 590-A.

To figure out MAGI, filers don’t actually look for a specific line on their tax return labeled “MAGI.” Instead, they have to do a little bit of math, starting with their Adjusted Gross Income (AGI).

Here is a step-by-step breakdown to find a MAGI:

  1. Find the Adjusted Gross Income (AGI): Before a tax filer can get to their modified income, they need their baseline AGI. Their AGI includes all their realized income (wages, interest, capital gains) minus specific “above-the-line” deductions, such as student loan interest or HSA contributions.
  2. If they’ve already filed their taxes, this is very easy to find: On Form 1040: Look at Line 11.
  3. Add Back” Specific Deductions: MAGI is essentially the filer’s AGI with certain tax deductions added back into it. For most average taxpayers, their AGI and MAGI are exactly the same because they don’t claim these specific niche deductions.
  4. Use IRS Worksheets for Precision: Because the calculation can change slightly depending on whether they are checking their eligibility for a Roth IRA contribution or a Traditional IRA deduction, the IRS provides specific worksheets in Publication 590-A.

Workers not covered by any workplace plan, and not married to someone who is, may deduct the full traditional IRA contribution regardless of income.

Roth IRA contributions face a different kind of restriction. The ability to contribute directly to a Roth IRA phases out and eventually disappears as income rises. For 2026, per the IRS newsroom:

  • Single filers and heads of household: contribution phases out between MAGI of $153,000 and $168,000
  • Married filing jointly: contribution phases out between MAGI of $242,000 and $252,000
  • Above these upper thresholds: direct Roth IRA contributions are not permitted

High earners above these thresholds may still access Roth treatment through the backdoor Roth strategy described in the Go Further callout above.

Both account types share the same combined annual contribution limit of $7,500 for 2026, or $8,600 for account holders aged 50 and older. That limit applies across all traditional and Roth IRAs held by the same individual in aggregate, per IRS Notice 2025-67.

Go Further: The IRS publishes a worksheet for calculating the exact reduced deduction amount when a traditional IRA contribution falls within the phase-out range for those covered by a workplace plan. The worksheet appears in IRS Publication 590-A, Contributions to Individual Retirement Arrangements, which is publicly available at irs.gov/publications/p590a. A separate worksheet for calculating the reduced Roth IRA contribution within the phase-out range appears in the same publication.

How a financial advisor can help

The tax-now versus tax-later question involves multiple variables that differ by household: current income, expected retirement income, Social Security taxation thresholds, Medicare premium calculations tied to MAGI, and the projected growth rate of the account over time.

State income tax treatment adds another significant dimension. Some states exempt traditional IRA and 401(k) distributions from state income tax entirely. Others tax them at full rates. For a retiree who plans to relocate, this difference can materially alter the traditional versus Roth calculation in ways that federal-only analysis would miss. A qualified financial advisor or tax professional can model the combined federal and state tax consequences of both approaches, given a specific household’s facts and planned retirement location, without prescribing a single answer as universally correct.

Can’t talk to an advisor right now? Use our Roth vs. Traditional Retirement Calculator to compare estimated after-tax values.

FAQs

Can contributions be made to both a traditional IRA and a Roth IRA in the same year? 

Yes, provided the income thresholds for Roth eligibility are met. The $7,500 annual limit for 2026 applies to the combined total across all traditional and Roth IRAs. Contributing $3,000 to a traditional IRA and $4,500 to a Roth IRA in the same year, for example, satisfies the limit. The combined total may not exceed $7,500, or $8,600 for those aged 50 and older, per IRS Notice 2025-67.

Does a Roth 401(k) have the same income limits as a Roth IRA? 

No. Roth 401(k) contributions are not subject to income limits. Any employee whose employer offers a Roth 401(k) option may contribute regardless of income. The income restrictions on direct Roth IRA contributions, which phase out between $153,000 and $168,000 for single filers in 2026, do not apply to Roth 401(k) contributions, per the IRS. The annual 401(k) contribution limit for 2026 is $24,500, separate from and in addition to the IRA limit.

What happens to the tax advantage if a withdrawal is taken before retirement? 

Early withdrawals from traditional IRAs taken before age 59½ are generally subject to income tax on the full distribution plus a 10 percent additional tax, though specific exceptions exist as listed above. Early withdrawals from Roth IRAs are treated differently depending on what is being withdrawn. Contributions to a Roth IRA, because they were made with after-tax dollars, can be withdrawn at any time without income tax or penalty. Earnings withdrawn early may be subject to both income tax and the 10 percent additional tax if the five-year earnings rule has not been satisfied and no exception applies, per IRS Publication 590-B. Converted amounts withdrawn within five years of a specific conversion may also trigger the 10 percent penalty if the account holder is under age 59½, per the conversion five-year rule.

Glossary

  • Backdoor Roth IRA. An informal term for a two-step strategy in which a nondeductible contribution is made to a traditional IRA and then converted to a Roth IRA. Available to high earners who exceed the income thresholds for direct Roth contributions. The pro-rata rule applies if the account holder holds other pre-tax IRA funds.
  • Deductibility phase-out. The income range over which the ability to deduct a traditional IRA contribution is gradually reduced to zero for workers covered by a workplace retirement plan. For 2026, single filers covered by a workplace plan face full deductibility up to MAGI of $81,000, with the deduction phasing out completely at $91,000, per the IRS.
  • Five-year rule. A Roth IRA holding period requirement that exists in two distinct forms. The earnings rule requires that the account be at least five years old before earnings can be withdrawn tax-free, with the clock starting January 1 of the first year a contribution was made. The conversion rule requires a separate five-year holding period for each Roth conversion, during which withdrawing converted funds triggers a 10 percent penalty for account holders under age 59½.
  • Modified adjusted gross income (MAGI). The income measure used by the IRS to determine eligibility for traditional IRA deductions and direct Roth IRA contributions. MAGI is calculated by taking adjusted gross income and adding back certain deductions, as specified in IRS Publication 590-A.
  • Ordinary income. Income taxed at standard federal marginal rates, including wages, salaries, and distributions from tax-deferred retirement accounts. Traditional IRA and 401(k) withdrawals are treated as ordinary income in the year received.
  • Required minimum distribution (RMD). The minimum annual withdrawal that IRS rules require from traditional IRAs and most employer retirement plans, beginning at age 73. Calculated by dividing the prior December 31 account balance by an IRS life expectancy factor. Roth IRAs are not subject to RMDs during the owner’s lifetime, though non-spouse beneficiaries who inherit a Roth IRA are generally subject to distribution rules under the SECURE Act.
  • Roth 401(k). An employer-sponsored retirement account that accepts after-tax contributions and produces tax-free qualified withdrawals. Not subject to income limits for contributions. Exempt from required minimum distributions during the owner’s lifetime beginning in 2024, per the SECURE 2.0 Act.
  • Roth IRA. A type of individual retirement account funded with after-tax dollars. Qualified distributions, including all accumulated earnings, are tax-free. No required minimum distributions apply during the owner’s lifetime. Direct contributions are subject to income phase-out limits, per IRS Publication 590-B.
  • Tax-deferred. A characteristic of traditional IRA and traditional 401(k) growth in which taxes on contributions and earnings are postponed until funds are withdrawn, at which point distributions are taxed as ordinary income.
  • Tax-free. A characteristic of Roth IRA and Roth 401(k) growth in which qualified distributions, including all accumulated earnings, are not subject to income tax, provided the five-year rule and qualifying conditions are met.
  • Traditional 401(k). An employer-sponsored retirement plan that accepts pre-tax contributions, reducing taxable income in the year of contribution. Growth is tax-deferred. Withdrawals are taxed as ordinary income, and required minimum distributions must begin at age 73.
  • Traditional IRA. A type of individual retirement account that may accept tax-deductible contributions, subject to income and workplace coverage rules. Growth is tax-deferred. Distributions are taxed as ordinary income, and required minimum distributions must begin at age 73.

Sources

Disclaimer: Steady Retire and MediaFeed are providers of educational content and information. This article is intended for informational and illustrative purposes only and does not constitute financial, legal, tax, or investment advice. The information provided does not create a professional-client relationship and should not be used as a substitute for consultation with a qualified financial advisor, tax professional, or attorney. While we strive to provide accurate and up-to-date information, rules and regulations regarding retirement are subject to change. Always consult with a certified professional regarding your specific financial situation.