An individual retirement account (IRA) is a type of retirement account you can open at any time, in contrast to a 401(k) retirement plan your employer might offer. The two most common types of IRAs are Traditional IRAs and Roth IRAs. Let’s learn more about Traditional and Roth IRAs to determine which is best for your financial circumstances—now and in the future.

What is a Traditional IRA?

A Traditional IRA is a type of retirement account anyone who earns income can open. Account holders fund a Traditional IRA with income that hasn’t yet been taxed, also known as pre-tax dollars. Traditional IRAs are also popular because they offer tax-deferred growth, enabling you to maximize the full dollar amount of your contributions.¹

In addition, any contributions you make to a Traditional IRA reduce your taxable income that year. However, there are IRA contribution limits on the amount you can deduct based on your modified adjusted gross income (MAGI). Deductions are also affected by whether an employer-sponsored retirement plan covers you and your spouse. 

How does a Traditional IRA work?

Traditional IRAs can act as their own retirement savings vehicle, a supplement to a workplace retirement plan, or a strategy to reduce your taxable income and shore up retirement savings if you’re self-employed. Note that you cannot withdraw funds from a Traditional—or Roth—IRA until you’re 59 ½ without paying a hefty early withdrawal penalty from the IRS. While there are some exceptions based on your financial circumstances, IRS penalty fees are typically 10% of the amount distributed early.

 When you withdraw funds in retirement, you’ll be taxed based on the tax bracket you qualify for at that time. However, your IRA funds will be subject to required minimum distributions (RMDs) starting at age 73.²

The Internal Revenue Service (IRS) determines yearly retirement account contribution limits depending on your age and compensation. These limits can change from year to year, but are staying the same in 2025 as it was in 2024. You can only contribute $7,000 in 2025 unless you are 50 or older and take advantage of the permitted $1,000 catch-up contribution. Meeting the contribution limit every year can help you maximize your tax-deferred retirement savings.

Traditional IRA: Pros and cons.

Now that you have a better idea of what a Traditional IRA can offer you, read on to explore the corresponding advantages and disadvantages. If any pros or cons stick out, make a note of them to return to later after discovering how a Roth IRA can help you reach your retirement goals.

Pros

• If eligible, contributions lower taxable income
• No income limits when contributing funds
• $1,000 catch-up contribution for those 50 and over
• Protected under federal bankruptcy laws 
• Taxes aren’t due until you withdraw funds in retirement
• FDIC Insured $250,000 separately from other non-IRA deposits.

Cons

• Withdrawals are taxed as personal income in the applicable tax bracket
• Required minimum distributions starting at age 73
• Contributions are limited based on compensation
• High income can reduce contribution-related deductions
• Not matched by an employer

What is a Roth IRA?

A Roth IRA is a deposit account that can help you save up for retirement. Like a Traditional IRA, a Roth A Roth IRA is a deposit account that can help you save up for retirement. Like a Traditional IRA, a Roth IRA restricts you from withdrawing funds before you’re 59 ½ if you want to avoid a 10% early withdrawal penalty from the IRS. In addition, Roth IRAs require that you wait five years from the time you first contributed to a Roth IRA account to withdraw the interest earned tax free.³

When you contribute to a Roth IRA, you pay taxes on your contributions in the year you make them. That way, you can withdraw funds from the Roth IRA in retirement without owing any taxes.

How does a Roth IRA work?

Unlike Traditional IRAs, Roth IRAs have no required minimum distributions. However, the contribution limits are the same as Traditional IRAs: $7,000, or — if you’re 50 and older — $8,000. Any gains your Roth IRA earns aren’t taxed, only the contributions you make. While Roth IRAs require you to bear the tax burden in the present, paying taxes on a smaller amount can result in a lesser tax burden overall

Roth IRAs do come with income restrictions regarding contributions. If you make $150,000 or less as an individual or $236,000 or less if you’re married filing jointly, you can contribute up to the limit in a Roth IRA. In addition, you can also use a Roth IRA as an estate planning tool if you want to bequeath it to a beneficiary upon your death.

Roth IRA: Pros and cons

Many individuals planning for retirement choose a Roth IRA based on the lack of taxes due during retirement. However, Roth IRAs do come with trade-offs. Review the advantages and disadvantages of Roth IRAs below and keep reading for a discussion of scenarios when Traditional and Roth IRAs are preferable.

Pros

• Money grows without being reduced by taxes
• Gains are not taxed; only contributions
• No required minimum distributions
• Can withdraw contributions at any time without incurring taxes or IRS penalties
• No age limits for contributions
• No taxes are due when you withdraw funds
• Withdrawals don’t count as taxable income
• FDIC Insured $250,000 separately from other non-IRA deposits.

Cons

• Not tax deductible when you contribute funds
• You may be ineligible to open this type of account if your income exceeds the limits
• No employer matching
• Must wait five years from your first Roth IRA contribution before you can withdraw earnings tax-free
• Must be 59 ½ to withdraw funds to avoid IRS penalty
• Contributions are limited based on compensation

Roth or Traditional IRA: Which is better?

Taxes comprise the largest difference between Traditional and Roth IRAs, as taxes are either due at the time of contribution (Roth) or withdrawal (Traditional). As you compare Roth and Traditional IRAs, consider your time horizon, investing style, and anticipated tax rate change during retirement. Since Traditional and Roth IRAs are tax-advantaged retirement accounts in their own way, there’s nothing saying you can’t have both.

When is a Traditional IRA best?

Select a Traditional IRA if you want to invest in a shorter amount of time or less aggressively. These IRAs also enable you to exploit a lower tax rate by deferring taxes.

Many people choose Traditional IRAs because there’s a potential for tax deductions in the present. If a high income renders you ineligible for a Roth IRA or you want to take required minimum distributions during retirement, a Traditional IRA isn’t a bad alternative. These advantages are even greater the closer you are to retirement.

When is a Roth IRA best?

If you plan on saving aggressively over a longer time horizon, Roth IRAs can help you optimize your efforts. These types of individual retirement accounts are also popular if you don’t expect a big drop in tax rates or if tax rates are expected to increase.

Roth IRAs are also preferable to those who want the flexibility of withdrawing their contributions in an emergency without facing the associated IRS penalties. Those just starting out in their careers also benefit the most from Roth IRAs. If you want to avoid taking out required minimum distributions during retirement, Roth IRAs are the way to go.

Explore your Traditional and Roth IRA options.

A retirement account is a beneficial type of financial account to have, regardless of which type you choose. Explore Popular Bank’s Traditional and Roth IRAs to determine which is best for your retirement plans. Better yet, open accounts of both types to maximize your retirement funds.