Last Updated January 08, 2021
Illustrated by Chelsea Miller

Individual retirement accounts (IRAs) are personal retirement plans. You must have earned income to contribute, and you can put money into an IRA whether or not you participate in an employer’s retirement plan.

Roth vs Traditional

There are two types of IRAs: a traditional IRA and the Roth IRA. The main difference between them is when you pay taxes.

A traditional IRA is tax deferred. This means that can contribute money before it's taxed, and you don't owe taxes on those contributions or your earnings until you withdraw the money. It's likely that you will be earning less when you begin to withdraw from your IRA, which means that you may end up being in a lower tax bracket and paying less overall in taxes. If you qualify, you may also be able to deduct your contributions to your IRA on your federal income tax return, which can lower how much you will need to pay.

A Roth IRA is not tax deferred, which means you owe taxes when you contribute the money to the account. But that means you won't have to worry about paying them later and your contribution can grow tax-free. Withdrawals of contributions and earnings are tax-free if your account has been open at least five years, and you’re at least 59 and a half.

Which IRA is for You?

When deciding which option is right for you, there are a few things to consider. Perhaps most importantly, is what you qualify for. You'll need to qualify for a Roth IRA based on your modified adjusted gross income (MAGI), and you'll also need to qualify in order to deduct your contributions to a traditional IRA from your federal tax return.

The income limits are stricter for deducting your contribution to a traditional IRA than for contributing to a Roth IRA. In 2021, for example, you can deduct all of your IRA contributions if you’re single, and you either don’t have a retirement plan where you work or your MAGI is less than $63,000. You can deduct a gradually decreasing portion of your contribution as your income gets closer to $73,000 and nothing if it’s above $73,000. You can always deduct the full amount of your contribution if you’re not eligible for a retirement plan at your job or your employer doesn’t offer one.


You’re eligible for a full Roth contribution in 2021 if you’re single and your AGI is less than $120,000. With an AGI between that amount and $135,000, you can put a gradually declining portion of your contribution into a Roth and the balance into a traditional IRA if you wish.

For a married couple filing a joint return, the income limits for a deductible traditional IRA begin at $104,000, and are phased out at $124,000 for 2021. Either of you can deduct your contribution if you have no retirement plan of your own at work or aren't eligible. But if your spouse has a plan, the amount you can deduct is reduced gradually if your joint modified adjusted gross income is over $196,000 in 2021, and eliminated if it's over $206,000. Each of you qualifies to contribute the full $6,000 to a Roth IRA if your joint MAGI is $196,000 or less in 2021 and smaller amounts until it reaches $206,000 when your eligibility is phased out.

Deductions are gradually phased out if you have a retirement plan.
Illustration: Cristi Cash

Withdrawing the Money

If you want to make a withdrawal before you're 59 and a half, you'll have to pay a 10% tax penalty. On the other hand, you must begin to take required minimum distributions (RMDs) after you turn 70 and a half (or 72 if you were born after June 30, 1949) if you have a traditional IRA. This is a minimum amount that you're required to withdraw each year. RMDs are taxed as ordinary income. If you have a Roth IRA, you won't have an RMD.

Contribution Limits




Spousal Accounts

If your husband or wife doesn’t work, but you do, you can contribute up to $6,000 for 2021 to a separate spousal account in your spouse’s name. The advantage for the nonworking partner is being able to build an individual retirement fund that he or she owns and controls.

It's Your Account




Illustration: Chelsea Miller

When to Contribute






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