The Core Difference: When You Pay Tax
An Individual Retirement Account (IRA) is a retirement savings account you open yourself — separate from your employer's 401(k). Both Roth and Traditional IRAs let your investments grow without being taxed each year. The difference is when you pay tax:
| Traditional IRA | Roth IRA | |
|---|---|---|
| Contributions | Pre-tax (may be deductible) | After-tax (not deductible) |
| Growth | Tax-deferred | Tax-free |
| Withdrawals in retirement | Taxed as ordinary income | Tax-free (if rules met) |
| Required minimum distributions | Yes, starting at age 73 | No (during owner's lifetime) |
| Early withdrawal of contributions | Taxes + 10% penalty | Contributions only: no tax, no penalty |
The Decision Framework: Tax Bracket Now vs. Later
The right choice depends on whether your tax rate will be higher now or in retirement:
- If you expect a lower tax rate in retirement: Traditional IRA — defer taxes until you're in a lower bracket
- If you expect a higher tax rate in retirement: Roth IRA — pay taxes now at the lower rate, withdraw tax-free later
- Unsure? Split between both — tax diversification gives you flexibility to withdraw from whichever account is more efficient at the time
Income Limits (2025)
Roth IRA: Phase-out begins at $150,000 (single) / $236,000 (married filing jointly). Above $165,000 single / $246,000 MFJ: not eligible to contribute directly.
Traditional IRA: Anyone with earned income can contribute, but the deductibility phases out if you or your spouse have a workplace retirement plan (like KC's 401k) above certain income thresholds.
2025 Contribution Limits
- $7,000 per year (combined Roth + Traditional)
- $8,000 if you're 50 or older (catch-up)
- You cannot contribute more than your earned income for the year
IRA limits are separate from your 401(k) limits — you can max both.
IRA vs. 401(k): Which First?
- Contribute to KC 401(k) up to the full match (5%) — this is the highest-return first step
- Max out a Roth IRA ($7,000) — more investment flexibility, tax-free growth
- Return to KC 401(k) up to the annual limit ($23,500) — still great tax benefits