Roth IRA vs. Traditional IRA: Which Is Right for Your Retirement Plan?

When it comes to building long-term wealth, retirement accounts remain one of the most powerful tools available. Among the many types of IRAs, two stand out as common options: the Roth IRA and the Traditional IRA

Both offer valuable tax benefits, but they work very differently—especially when it comes to income tax, eligibility, and withdrawal rules.

For high-net-worth individuals and families, understanding the key differences between these accounts is essential. Your choice can influence your tax rate today, the growth of your retirement savings, and the legacy you leave to beneficiaries.

This guide will help you evaluate a Roth IRA vs. a Traditional IRA with the clarity you need to align your retirement plan with your broader financial situation.

The Core Difference Between Roth and Traditional IRAs

At a high level, the difference comes down to when you pay taxes:

• Traditional IRA: Contributions are typically made with pre-tax dollars, offering an upfront tax deduction. Your money grows tax-deferred, but withdrawals in retirement are taxed as ordinary income.
• Roth IRA: Contributions are made with after-tax dollars. There’s no immediate tax break, but your account benefits from tax-free growth and you enjoy tax-free qualified withdrawals in retirement.

In other words, with a Traditional IRA you get the tax savings now, while with a Roth IRA you get the tax savings later. Sounds simple, but there are unique ways to blend your savings and withdrawal strategies between them to minimize your lifetime tax burden. Let’s dig in.

Contribution Rules and Limits

Annual Contribution Limits

The IRS sets IRA contribution limits each year. For 2025:

• $7,000 if you’re under age 50
• $8,000 if you qualify for a catch-up contribution (age 50 or older)

These limits apply across all your retirement accounts of this type. For example, you cannot contribute $7,000 to both a Roth and a Traditional IRA in the same tax year—the combined total must stay within the limit.

Earned Income Requirement

Contributions must come from earned income—wages, salaries, or self-employment income. Passive income, like interest or dividends, doesn’t count toward IRA eligibility.

Income Limits and Eligibility

Here’s where things get more complex—and where higher income households need to pay attention.

Roth IRA Income Limits

Roth IRAs are subject to income limits based on your filing status and Modified Adjusted Gross Income (MAGI). For 2025:

• Single filers: Full contributions allowed if MAGI is below $146,000. Contributions phase out between $146,000–$161,000. Above $161,000, direct contributions aren’t allowed.
• Married filing jointly: Full contributions allowed if MAGI is below $230,000. Phase-out between $230,000–$240,000. Above $240,000, no direct contributions are permitted.

Traditional IRA Deduction Limits

Anyone can make Traditional IRA contributions, but whether they’re deductible contributions depends on your income and whether you (or your spouse) are covered by a workplace retirement plan.

If neither you nor your spouse are covered by a retirement plan at work, your Traditional IRA contributions are fully deductible, regardless of income. The same is true if you’re single and not covered by an employer plan—you can deduct the full amount.

However, if you or your spouse do participate in a workplace plan, the IRS sets income limits that determine how much of your contribution you can deduct:

• Single filers covered by a retirement plan: Full deduction if you earn less than $77,000, partial deduction between $77,000–$87,000, and no deduction above that range.
• Married couples filing jointly, with one spouse covered by a plan: Full deduction if your combined income is below $123,000, partial between $123,000–$143,000, and no deduction above that range.

High earners often find their ability to deduct contributions limited. In this case, strategies like the backdoor Roth IRA conversions are a great option to consider.

Withdrawal Rules and RMDs

Traditional IRA

• Withdrawals are taxed as ordinary income.
• Subject to Required Minimum Distributions (RMDs) beginning at age 73.
• Early withdrawals before age 59½ typically face a 10% early withdrawal penalty, unless exceptions apply.

Roth IRA

• Tax-free withdrawals in retirement if you meet the 5-year rule and are age 59½ or older.
• No RMDs during the account owner’s lifetime, making Roth IRAs an effective estate planning tool for beneficiaries.
• Contributions (but not earnings) can be withdrawn anytime penalty-free.

For families with significant assets, avoiding forced distributions can mean more flexibility and potentially lower taxes for heirs.

Tax Planning Considerations

When a Roth IRA May Be Better

• You expect to be in a higher tax bracket later in retirement.
• You value tax-free growth and flexibility in retirement.
• You want to avoid RMDs and leave a tax-efficient legacy.

When a Traditional IRA May Be Better

• You are in a higher income phase of your career and want an upfront tax deduction.
• You expect to be in a lower tax bracket during retirement.
• You’re seeking tax-deferred growth while maximizing today’s tax break.

High-net-worth families often use a mix of both account types to diversify their tax-advantaged retirement strategy.

Backdoor Roth IRA: A Strategy for Higher Earners

If your income limits prevent direct Roth IRA contributions, you may still access Roth benefits through a backdoor Roth IRA. This involves:

1. Making nondeductible Traditional IRA contributions with after-tax dollars.
2. Converting the balance to a Roth IRA.

However, it can trigger taxes on pre-tax balances, making professional guidance essential. A financial advisor can help determine if this strategy fits your financial planning goals.

The Role of Workplace Retirement Plans

If you already maximize your workplace retirement plan, such as a 401(k), adding IRA contributions can enhance tax diversification. A Roth IRA may complement a Traditional 401(k), or vice versa, balancing pre-tax dollars and after-tax dollars for long-term tax savings.

Estate Planning and Beneficiaries

For high-net-worth families, IRAs aren’t just about your lifetime. They’re about what happens next. Here’s how each account type is taxed once the balance is passed on to your next of kin:

• Traditional IRA: Beneficiaries pay taxes on inherited distributions as ordinary income.
• Roth IRA: Inherited Roth IRAs generally allow tax-free withdrawals for beneficiaries, subject to distribution timelines.

Putting It All Together

Choosing between a Roth IRA vs. Traditional IRA depends on your financial situation, projected tax rate, and long-term goals. Here are the key differences:

How a Financial Advisor Can Help You Make the Right Choice

While general rules help frame the discussion, the decision isn’t one-size-fits-all. Your choice should consider:

• Current and future tax bracket expectations
• Interaction with your workplace retirement plan
• Long-term retirement savings goals
• Any potential conversion opportunities
• The role of IRAs in your broader financial planning and estate strategy

For high-income households, the interplay between taxable income, eligibility rules, and IRA contribution limits is complex. A trusted financial advisor can model different scenarios, highlight tax savings, and ensure your retirement accounts align with your overall wealth strategy.

Final Thoughts

Whether you choose a Traditional IRA, a Roth IRA, or a combination of both, you’re making a smart move toward securing your retirement. The key is not just opening an account—but funding it consistently, maximizing contributions where possible, and aligning your strategy with your expected tax rate and legacy goals.

However, your retirement strategy is just one piece of a much larger puzzle. To quickly pressure-test the rest of your financial plan, take our free 2-minute financial analysis. You’ll receive instant results in four key areas of your plan, and actionable insights for your best next steps.