Last Updated on January 3, 2025
Since you contribute to Traditional IRA with after tax money, you need to keep track of that – and be sure to bring it to your accountant’s attention when doing taxes to remove that total from taxable income.
Traditional IRA contributions in 2024/2025 are $7,000, or up to $8,000 if you’re age 50 and older.
- Contributions to a 401(k) are tax deductible and reduce your taxable income before taxes are withheld from your paycheck.
- Retirement distributions from 401(k)s are taxed at ordinary income tax rates.
- A traditional IRA account allows individuals to contribute pre-tax or after-tax dollars towards investments that can grow tax-deferred.
- A Roth IRA has no tax deduction for contributions, but contributions can be withdrawn tax free in retirement.
Roth IRA Contribution Limits
The annual contribution limits are much smaller with Roth IRA accounts than for 401(k)s.
- Individuals with a tax filing status of single can make a full contribution if their annual income is less than $138,000. Contribution amounts are reduced (phased out) if your income ranges from $138,000 to $153,000. If you earned $153,000 or more, you can’t contribute anything to a Roth IRA.
- These numbers can vary year to year, check irs.gov for details of the current year.
Types of IRAs
- Traditional IRA: A type of IRA that can be funded by contributions, rollovers, or conversions, with tax-deductible contributions and tax-deferred growth.
- Contributory IRA: A type of IRA that is funded by direct contributions from the account holder, with tax-deductible contributions and tax-deferred growth.
- Roth IRA: A type of IRA that is funded by after-tax contributions, with tax-free growth and withdrawals.
- Roth Contributory IRA: A type of IRA that is funded by direct contributions from the account holder, with after-tax contributions and tax-free growth and withdrawals.
Compare 401k to Roth 401k
- A Roth 401(k) uses after-tax contributions, and withdrawals are tax-free. Traditional 401(k)s allow pre-tax contributions and taxable withdrawals.
- Roth 401(k)s are better if you believe you will be paying a higher tax rate in retirement than you pay now, while traditional 401(k)s are better if you believe you will pay a lower tax rate in retirement than you pay now.
- A traditional 401(k) has the advantage of more options later on, but a Roth may be the smarter choice for big savers.
Compare IRA, Roth IRA
- With a Roth IRA, you contribute after-tax dollars, your money grows tax-free, and you can generally make tax- and penalty-free withdrawals after age 59.5.
- With a traditional IRA, you contribute pre- or after-tax dollars, your money grows tax-deferred, and withdrawals are taxed as current income after age 59.5.
- Contributions to traditional IRAs are tax-deductible, but withdrawals in retirement are taxable.
- With a Roth IRA, you can leave the money in for as long as you want, letting it grow as you get older.
- With a traditional IRA, you must start withdrawing the money by the time you reach age 70.5.
- With a Roth IRA, you pay taxes today in exchange for keeping your savings and earnings tax-free in the future.