Traditional vs Roth IRA: The Complete Guide for Young Professionals in 2025

Planning for retirement? Here's what you need to know:

• Traditional IRA: Contributions are tax-deductible now, but withdrawals in retirement are taxed as income. No income limits for contributions.
• Roth IRA: Pay taxes upfront, but enjoy tax-free withdrawals in retirement. Income limits apply ($150,000 for singles, $236,000 for married couples).

2025 Contribution Limits:

• Up to $7,000/year (under 50)
• Up to $8,000/year (50 or older)

Key Difference: Traditional IRAs lower your current tax bill, while Roth IRAs offer long-term tax-free growth.

Quick Comparison

Feature	Traditional IRA	Roth IRA
Tax Benefits	Tax-deductible contributions	Tax-free withdrawals
Income Limits	None	$150,000 (single), $236,000 (married)
Early Withdrawals	Taxed + 10% penalty (before 59½)	Contributions tax- and penalty-free
Required Distributions	Start at age 73	None

Tip: If you're early in your career and expect your income to grow, a Roth IRA might be the better choice. For immediate tax savings, consider a Traditional IRA.

Start saving today - time and compound growth are your biggest allies!

1. Traditional IRA

A Traditional IRA is a retirement account that provides an immediate tax advantage by allowing you to deduct contributions from your taxable income for the current year. However, keep in mind that withdrawals during retirement are taxed as ordinary income.

Tax Treatment

Contributions to a Traditional IRA may qualify for a tax deduction, and your investments grow tax-deferred until you withdraw them. The deduction you can claim depends on your income and whether you’re covered by a workplace retirement plan.

For example, in 2025, if you're a single filer with a workplace plan, you can:

• Take the full deduction if your modified adjusted gross income (MAGI) is $79,000 or less.
• Get a partial deduction if your MAGI falls between $79,001 and $88,999.
• Receive no deduction if your MAGI is $89,000 or more.

Here’s a breakdown for different filing statuses:

Filing Status	MAGI Range	Deduction Limit
Single	≤ $79,000	Full deduction
Single	$79,001 - $88,999	Partial deduction
Single	≥ $89,000	No deduction
Married Filing Jointly	≤ $126,000	Full deduction
Married Filing Jointly	$126,001 - $145,999	Partial deduction
Married Filing Jointly	≥ $146,000	No deduction

If you don’t have a workplace retirement plan, you can deduct your full contribution regardless of your income.

Contribution Rules

For 2025, the contribution limit is $7,000 per year if you’re under 50, and $8,000 if you’re 50 or older. One key advantage of Traditional IRAs is that there are no income limits for making contributions - anyone with earned income is eligible. However, the $7,000 annual cap applies to the combined total of contributions to both Traditional and Roth IRAs. For instance, if you put $3,000 into a Traditional IRA, you can only contribute $4,000 to a Roth IRA that same year.

Withdrawal Rules

Traditional IRAs have specific rules for withdrawals:

• If you withdraw funds before age 59½, you’ll face income tax and a 10% early withdrawal penalty, unless you qualify for an exception.
• After age 59½, withdrawals avoid the penalty, though they’re still taxed as income.
• At age 73, you must start taking required minimum distributions (RMDs). Your first RMD must be taken by April 1 of the year after you turn 73, and subsequent RMDs are due by December 31 each year.

Failing to take your RMDs can lead to a hefty penalty - 25% of the amount you should have withdrawn. However, this penalty may drop to 10% if you correct the mistake promptly.

Eligibility Requirements

Traditional IRAs have very few barriers to eligibility. The main requirement is that you must have earned income, such as wages, salaries, tips, or self-employment income. There are no age restrictions for making contributions, and there’s no income ceiling for eligibility. That said, high earners covered by a workplace retirement plan may not be able to deduct their contributions.

This flexibility makes Traditional IRAs an appealing choice for younger professionals who want to lower their current tax bill while building a foundation for retirement savings.

Next, we’ll take a closer look at Roth IRAs and how they differ from Traditional IRAs.

2. Roth IRA

A Roth IRA works differently from a Traditional IRA, offering tax-free growth and tax-free withdrawals during retirement. Instead of getting an upfront tax deduction, you contribute using post-tax dollars, reaping the rewards later when you retire.

Tax Treatment

With a Roth IRA, your contributions are made with post-tax dollars, meaning they aren’t tax-deductible. However, any growth in your investments is completely tax-free, and qualified withdrawals during retirement are also tax-free. This setup can be especially appealing if you expect to move into a higher tax bracket later in your career. For example, paying taxes on a $60,000 income now could save you significantly if you’re earning $150,000 or more down the line.

Contribution Rules

For 2025, Roth IRA contribution limits are the same as those for Traditional IRAs. You can contribute:

• Up to $7,000 per year if you're under 50
• Up to $8,000 per year if you're 50 or older

However, income limits apply to Roth IRAs, and these determine whether you can contribute directly. Below is a breakdown based on your filing status:

Filing Status	MAGI Range	Contribution Limit
Single	< $150,000	$7,000 maximum contribution
Single	$150,000 - $164,999	Reduced contribution
Single	≥ $165,000	No contribution allowed
Married Filing Jointly	< $236,000	$7,000 maximum contribution
Married Filing Jointly	$236,000 - $245,999	Reduced contribution
Married Filing Jointly	≥ $246,000	No contribution allowed

If you’re married filing separately and lived with your spouse during the year, contributions are reduced if your MAGI is under $10,000 and disallowed entirely if it’s $10,000 or more.

Keep in mind, the annual contribution limit applies to the combined total of both your Traditional and Roth IRAs.

Withdrawal Rules

One of the perks of a Roth IRA is that you can withdraw your contributions anytime without taxes or penalties, as these contributions were made with after-tax dollars.

However, withdrawing earnings has specific rules. To avoid taxes and penalties, your Roth IRA must have been open for at least five years, and you must meet one of these conditions:

• Be 59½ or older
• Use up to $10,000 (lifetime limit) for a first-time home purchase
• Become disabled

If you withdraw earnings without meeting these criteria, they could be subject to income taxes and a 10% penalty. The IRS also follows an ordering rule for withdrawals: contributions come out first, then conversions, and finally earnings. This ensures your initial contributions are protected.

Eligibility Requirements

To contribute to a Roth IRA, you need earned income and must fall within specific income limits. There’s no age limit for contributions - as long as you’re earning income, you’re eligible.

Income limits are based on your Modified Adjusted Gross Income (MAGI) and filing status. For instance:

• Single filers: Full contributions allowed with a MAGI under $150,000; reduced contributions between $150,000 and $164,999; no contributions at $165,000 or more.
• Married filing jointly: Full contributions with a MAGI under $236,000; reduced contributions between $236,000 and $245,999; no contributions at $246,000 or higher.

A standout feature of a Roth IRA is the absence of required minimum distributions (RMDs) during your lifetime. This means your investments can continue growing tax-free for as long as you want. For young professionals, especially those in lower tax brackets early in their careers, this can lead to decades of tax-free growth, making a Roth IRA a powerful long-term savings tool.

Next, we’ll weigh the pros and cons of each option.

Pros and Cons

When deciding between a Traditional IRA and a Roth IRA, understanding the benefits and limitations of each can make all the difference. Here's a quick comparison of their key features to help guide your decision:

Feature	Traditional IRA	Roth IRA
Immediate Tax Benefits	Contributions are tax-deductible, reducing your taxable income now	No upfront tax deduction
Retirement Tax Treatment	Withdrawals taxed as ordinary income	Qualified withdrawals are entirely tax-free
Income Restrictions	Open to all income levels for contributions	Contribution limits apply ($150,000 for singles, $236,000 for married filing jointly)
Early Withdrawal Flexibility	Subject to a 10% penalty plus taxes before age 59½	Contributions can be withdrawn anytime, tax- and penalty-free
Required Distributions	Must begin taking RMDs at age 73	No RMDs during your lifetime
Long-term Growth Potential	Tax-deferred growth, taxed when withdrawn	Growth and withdrawals are tax-free

Traditional IRA: The Ups and Downs

The advantages of a Traditional IRA lie in its immediate tax benefits and accessibility. For instance, if you earn $80,000 annually and contribute $7,000 to a Traditional IRA, your taxable income drops to $73,000, potentially saving you hundreds on your current tax bill. Plus, there are no income restrictions, making it a solid option for higher earners who may not qualify for a Roth IRA. This immediate tax relief can also free up cash for other financial needs.

However, the drawbacks emerge in retirement. Every dollar you withdraw is taxed as ordinary income, which might push you into a higher tax bracket if your savings are substantial. Additionally, required minimum distributions (RMDs) begin at age 73, forcing you to withdraw funds even if you don’t need them, potentially leading to unwanted tax liabilities and limiting what you can pass on to heirs.

Roth IRA: Long-Term Growth and Flexibility

The advantages of a Roth IRA shine over the long haul. A $7,000 contribution invested at a 7% annual return could grow to about $75,000 over 35 years, and all that growth would be tax-free in retirement. Roth IRAs also offer unmatched flexibility - young professionals, in particular, can benefit from the ability to withdraw contributions at any time without penalties, making it a dual-purpose account for retirement and emergencies. Additionally, the absence of RMDs means your money can keep growing tax-free for as long as you like.

The drawbacks of a Roth IRA are mainly tied to its limitations. High earners may face contribution restrictions, and there’s no immediate tax deduction, which could be a downside if you need current tax relief.

For younger investors, the time advantage often makes Roth IRAs a standout choice. If you’re 25 years old and contribute $700 annually for 35 years with a 7% return, you could accumulate nearly $104,000 tax-free. In comparison, a Traditional IRA would require you to pay taxes on withdrawals, reducing your effective retirement savings depending on your future tax rate.

Making the Right Choice

Your decision ultimately depends on your financial priorities. If you need immediate tax savings and expect to be in a lower tax bracket during retirement, a Traditional IRA might be the better option. On the other hand, if you’re focused on maximizing long-term, tax-free growth and can handle paying taxes now, a Roth IRA could be your best bet. Each has its strengths, and the right choice depends on where you are in your financial journey.

Conclusion

Deciding between a Traditional IRA and a Roth IRA becomes much clearer when you focus on the essentials: when you want to pay taxes and your expectations for the future of your income and tax rates.

For example, if you're a recent graduate earning $45,000 and anticipate steady salary growth, a Roth IRA could be the smarter move. Why? Because you're paying taxes now, while you're in a lower tax bracket, and enjoying tax-free withdrawals later. As Stephen Rischall, CFP at Navalign Wealth Partners, explains:

"In general, Roth contributions have an edge over traditional contributions for young people. Having tax-free distributions in retirement is great, especially if taxes go up in the future. Since younger investors have a longer time horizon, the impact of compounding growth benefits even more."

On the other hand, professionals nearing the $79,000 deduction phase-out might need to weigh their options more carefully. If immediate tax savings are critical to boost your current financial goals, a Traditional IRA can help by reducing your taxable income today. But keep in mind, withdrawals in retirement will be taxed as ordinary income. This makes it essential to consider both your current earnings and where you think tax rates might land in the years ahead.

For high-income earners who exceed Roth IRA eligibility limits, a Traditional IRA is often the go-to option.

Roth IRAs also bring a unique advantage: flexibility. Contributions can be withdrawn without penalties, making them a safety net if you’re planning a career shift, pursuing further education, or starting a business. This added accessibility can be a game-changer for those with uncertain or evolving financial plans.

Still unsure about which path to take? Roger Young, CFP and Thought Leadership Director, offers this perspective:

"If you're still unsure of what to do in your situation, the tiebreaker often should be in the Roth account's favor."

This advice aligns with the idea of tax diversification - a strategy that can make a big difference in your retirement planning. For instance, if you’re already contributing to a Traditional 401(k) through work, adding a Roth IRA creates a balance. It gives you the flexibility to choose how to withdraw funds in retirement based on your tax situation at the time.

The most important takeaway? Start saving now. Whether you choose a Traditional or Roth IRA, the power of compound growth works in your favor. A $7,000 annual contribution starting at age 25, with a 7% return, can grow into substantial wealth over 40 years. The sooner you begin, the more time your investments have to grow. No matter which account you pick, taking that first step is the key to building a solid financial future.

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