As Tax Day approaches (Wednesday, April 15, 2026) we have a lot of conversations with our clients about what that means for funding retirement accounts. For people funding Traditional and Roth IRA’s, the deadline to contribute for 2025 is also Tax Day. That makes the beginning of each year a unique time in the year where some people can fund a retirement account for both the previous year and the current year. We have found that a lot of people who have been saving and aren’t sure where to get started can make a large impact by getting that started early in the year. If that is you, time is running short as you won’t be able to contribute for 2025 starting on April 16th.
One of the first things to know is that the contribution limits for IRA’s is $7,000 for the tax year 2025 for people under the age of 50 ($8,000 if you’re 50 or above) and $7,500 for the tax year 2026 ($8,600 if you’re 50 or above). That means a married couple under 50 could potentially fund Roth IRA’s right now with $29,000! A married couple 50 or above could contribute $32,200.
How do you choose between a Traditional IRA and a Roth IRA? This is an important and difficult decision for people every year. It is a deeply personal and individualized decision, and we probably can’t give you the perfect answer for you in this format. But we can discuss some rules of thumb and increase your knowledge to the point where you can make a confident decision. Or you are also welcome to reach out and speak with one of our financial advisors to get some guidance! But let’s start with some basic information to learn the differences between a Traditional and Roth IRA.
What is the difference between a Traditional and a Roth IRA?
With a Traditional IRA, assuming you qualify with income, you can deduct your contribution from your income for the tax year in which you are making the contribution. For example, if you earned $100,000 and decided to put $7,000 in a Traditional IRA for 2025, you would only be taxed on $93,000 of income for 2025. So, if your tax professional recommends you use an IRA to lower your tax liability or increase the size of your refund, they are talking about a Traditional IRA.
The tax deduction is half of the story of a Traditional IRA. The second half is what happens to the growth of the account over time and what happens when you take the money out. When money grows over time in a Traditional IRA, you aren’t taxed on it. But when you take it out (ideally after age 59½ to avoid an early withdrawal penalty) you are taxed on the full amount that is taken out.
So to quickly recap the Traditional IRA, you get a tax deduction when you put the money in but you pay taxes when money is taken out in the future.
With a Roth IRA, you cannot deduct the contribution from your income in the tax year you are making the contribution. So, if you make $100,000 and decided to put $7,000 in a Roth IRA for 2025, you would still be taxed on $100,000.
However, when you wait until you are past age 59½ (and an additional requirement that the account has been funded for at least 5 years) you are able to take out money completely income tax free.
So, the Roth IRA doesn’t give you the same tax deduction when you put money in, but everything you take out, including all of the earnings, are tax free.
Rules of Thumb
So, what are the rules of thumb that you can use to help you decide whether to use a Traditional IRA or a Roth IRA?
- The younger you are, the more you should think about a Roth IRA. This one isn’t perfect, but the general principal is that you have more time to let the money compound tax free, so you want to take advantage of time to grow the money with a Roth IRA. The reason it’s not perfect is that it can still make sense for taxpayers that are later in their career to use a Roth IRA, so this rule pertains more to younger taxpayers.
- If you think your income is at or near its peak, you may want to use a Traditional IRA. If you believe you are at the peak of your income, you likely will value the tax deduction more than tax free growth because you’ll likely be withdrawing the money in retirement in a lower tax bracket.
- If your household has significant pension income, you may want to use a Roth IRA. The primary reason for this one is that with pension income you’re less likely to be in a lower tax bracket in retirement, so having access to tax free income could be more valuable.
- If you have a one-year spike in income that you don’t expect to continue, a Traditional IRA is probably right for that year. Just like #2, when your income is higher than usual, the tax deduction is especially valuable.
I want to reiterate again that these “rules of thumb” aren’t ironclad and shouldn’t be taken as absolute. Hopefully they are good enough to get you started down the path to what you should consider doing as Tax Day draws near. As I mentioned before, if you would like to discuss it in person, please reach out and we’ll schedule a phone call or meeting with one of our financial advisors to discuss the specifics of your situation and help you make the best decision for your financial future!