Roth vs. Traditional IRAs: How 2025 Tax Changes Will Impact Your Retirement Plans

Reviewing your retirement strategy regularly ensures that your goals remain aligned with your financial plan. The beginning of the year can be an ideal time to reassess your plan, especially as new tax laws and policy changes are often announced or implemented around this time. In 2025, there have also been some updates to IRA rules that could influence whether a Roth or Traditional IRA is the better choice for your long-term savings. Understanding these changes can help you make better decisions about where to invest.  

A financial advisor can help you make sense of these rules and how they impact you. This article will also break down some key updates and how they may impact your retirement planning.  

Roth IRA vs Traditional IRA - Understanding how taxes will impact your selection in 2025

The decision between these two accounts is essentially all about how you expect your tax situation to change over time. Both accounts offer tax advantages, but they work in opposite ways. Roth IRAs offer tax-free investment growth over the years and tax-free withdrawals in retirement. Since contributions are made with after-tax dollars, there is no immediate tax break to benefit. However, you can gain a potential tax advantage later if tax rates increase or your income grows. Traditional IRAs, on the other hand, provide tax-deferred growth and allow contributions to be made with pre-tax dollars. While this lowers your taxable income in the current year, all withdrawals in retirement are taxed as ordinary income. So, if you anticipate being in a lower tax bracket in retirement, you may find a Traditional IRA more advantageous.

The tax treatment of both accounts can help you settle the debate over the Traditional IRA (before tax) vs Roth IRA (after tax). However, there is one more factor to assess. You cannot just contribute to either type of IRA. Income limits and your tax filing status play a major role in deciding your eligibility, particularly with Roth IRAs. In 2025, contributions to a Roth IRA may be limited or completely phased out if your Modified Adjusted Gross Income (MAGI) is higher than the thresholds set by the Internal Revenue Service (IRS). Traditional IRAs are more flexible when it comes to contributions. Anyone with earned income can contribute to them. However, the account’s tax deductibility depends on whether you or your spouse has access to a workplace retirement plan. If you are covered by an employer-sponsored plan, the ability to deduct your contributions phases out at higher income levels. Even if you do not qualify for a tax deduction, you can still contribute to a Traditional IRA. In this case, the primary benefit is tax-deferred growth rather than an immediate reduction in taxable income.  

Let’s find out more about the income limits for both accounts.

Roth IRA income limits for 2025

Not everyone is allowed to contribute to a Roth IRA. The ability to make a full or partial contribution depends on your MAGI and tax filing status. Here’s what you should know:

Tax filing status	MAGI	Contribution limit for tax filers under 50	Contribution limit for tax filers aged 50 or older
Single filers	Less than $150,000	$7,000	$8,000
	Greater than or equal to $150,000 but less than $165,000	Partial contribution	Partial contribution
	Greater than or equal to $165,000	Not eligible	Not eligible
Married filers filing joint returns	Less than $236,000	$7,000	$8,000
	Greater than or equal to $236,000 but less than $246,000	Partial contribution	Partial contribution
	Greater than or equal to $246,000	Not eligible	Not eligible
Married filers filing separate returns	Less than $10,000	Partial contribution	Partial contribution
	Greater than or equal to $10,000	Not eligible	Not eligible

 

You must know how to calculate your MAGI to ensure you can correctly plan your Roth IRA contributions. Here’s how you can calculate it:

• Take your gross income, which includes all earnings, before any deductions. For married couples filing jointly, this covers both spouses’ earnings.
• Subtract any tax deductions and adjustments from your gross income to determine your Adjusted Gross Income (AGI). However, you may need to add some of the deductions to the AGI to calculate MAGI. These include student loan interest, foreign-earned income exclusions, and foreign housing deductions.

It can be tricky to calculate your MAGI and AGI. Therefore, hiring a financial advisor or tax professional can help ensure accuracy and avoid hassles.

If you fall into these limits, you can use a Roth IRA. In fact, you can have more than one Roth IRA, too, as long as you fit the income threshold guidelines. However, if you calculate your MAGI and find that you cannot contribute to a Roth IRA, you can consider a different strategy. It is important to note that even if you cannot make direct contributions to a Roth IRA due to income limits, you do have the option to use a Traditional IRA. You can consider converting an IRA to a Roth IRA by first investing in a Traditional account and then using the backdoor Roth IRA strategy. This allows you to convert your Traditional IRA funds to a Roth IRA. A Roth IRA limits contributions for high-income earners, but a Traditional IRA allows contributions at any income level, making it more accessible irrespective of your annual income.

An important rule to note about both accounts is that your contributions cannot exceed your earned income for the year. 

2025 Roth IRA contribution limits

For 2025, you can contribute up to $7,000 to a Roth IRA, with those aged 50 and older eligible for an additional $1,000 catch-up contribution. Your total contribution cannot exceed 100% of your earned income or the IRS limit, whichever is lower.

2025 Traditional IRA contribution limits

The contribution limits are the same for both accounts.

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What are the changes made to Roth and Traditional IRAs in 2025?

Before you select an IRA, you must understand how upcoming tax changes can impact your decisions. There are three main rules you need to know of in 2025:

1. Expiration of the tax cuts from the Tax Cuts and Jobs Act (TCJA)

One of the biggest shifts to expect in 2025 is the tax treatment of your distributions. Traditional IRAs are taxed in retirement, while distributions from a Roth IRA are not taxable. However, the SECURE 2.0 Act can affect how these taxes are actually implemented. The Tax Cuts and Jobs Act (TCJA) of 2017 lowered tax rates for both individuals and businesses while also adjusting deductions, depreciation rules, expensing, and tax credits. However, these tax cuts were not permanent, and some provisions are set to expire in 2025. This could increase federal tax rates, leading to higher future tax bills for you. These tax changes could make a Roth IRA even more attractive. Roth IRA contributions are made with after-tax dollars, so the qualified withdrawals in retirement are completely tax-free. If you lock in today’s lower tax rates, your withdrawals will not be impacted by potential increases in the future. Traditional IRAs, on the other hand, provide a tax deduction on contributions today, but withdrawals in retirement are taxed as ordinary income. If tax rates rise in the coming years, you could end up paying more in taxes on your withdrawals than you would under current rates.

Given the fluctuating tax rules, keeping an eye on tax policy changes is essential for long-term planning.

2. Higher Required Minimum Distribution (RMD) age in 2025 and beyond

Another thing to keep in mind is the extension of the increased RMD age. RMDs are compulsory withdrawals from a Traditional IRA after a certain age. Failure to withdraw your funds from a Traditional IRA as per your RMD schedule leads to penalties. However, the SECURE 2.0 Act raised the RMD age to 73 in 2023. As a result, retirees can keep their funds growing tax-deferred for longer. The RMD age is 73 for the year 2025 as well, but the RMD age is expected to increase to 75 by 2033. This gives Traditional IRA holders even more time to allow their investments to grow tax-deferred. So, you can still benefit from a Traditional IRA if you do not qualify for a Roth IRA but still want to lower your taxability in retirement.

Please note that RMDs do not apply to Roth IRAs.   

3. Changed rules for inherited IRAs

Rules around inherited IRAs have changed for those who inherited an IRA after January 1, 2020. Under the current guidelines, most beneficiaries must withdraw all funds from the inherited account within 10 years of the original owner’s death. So, your inheritors can no longer use the stretch IRA strategy, which allows beneficiaries to take smaller withdrawals over their lifetime and maximize tax-deferred growth. While the 10-year rule applies to most people, there are exceptions for certain beneficiaries who can still stretch distributions over their lifetime. These include surviving spouses, children under the age of 21, people who are disabled or chronically ill, and beneficiaries less than 10 years younger than the original account holder. Surviving spouses have even more flexibility as they can roll the inherited IRA into their own and delay RMDs until reaching their own Required Beginning Date (RBD). If you fall into one of these categories, the IRS allows you to take RMDs over your lifetime. However, others must adhere to the 10-year rule.

For those subject to the 10-year rule, the IRS had provided temporary relief for missed RMDs between 2021 and 2024. However, starting in 2025, failure to take the required withdrawals will result in a 25% penalty on the amount that should have been withdrawn. This penalty can be reduced to 10% if corrected in time.

It is important to understand how these changes impact your retirement strategy. This change also affects your choice between a Roth IRA and a Traditional IRA, especially if you are considering how your heirs will inherit the account. If they inherit a Traditional IRA, they will owe taxes on withdrawals, which will potentially push them into a higher tax bracket and result in a large tax bill. However, while the Roth IRA is still subject to the 10-year withdrawal rule for most beneficiaries, the key difference is that withdrawals are tax-free since you already paid taxes upfront. So, your heirs can let the money grow tax-free for 10 years and then withdraw it without worrying about an increased tax burden.

Which is better, a Traditional IRA or a Roth IRA?

The biggest factor to consider when deciding the better option is when you prefer to pay taxes. With a Roth IRA, you pay taxes upfront on the money you put in. But once it is in, it grows completely tax-free, and when you take it out in retirement, you do not owe taxes. A Traditional IRA works the other way around. You might be able to contribute with pre-tax dollars, which lowers your taxable income right now. But later, when you start withdrawing that money, you will have to pay taxes on it. If your income is lower in retirement, you could end up paying less in taxes than you would today. So, it really comes down to whether you would rather pay now or later.

Your income also plays a role in ascertaining your eligibility. High earners do not usually qualify to contribute to a Roth IRA directly, but they can still contribute to a Traditional IRA. If you earn too much for a Roth IRA but want to take advantage of tax-free withdrawals, a Roth conversion could be helpful. However, it is advised to consult with a financial advisor as you would still owe tax on the conversion. Additionally, if you have a workplace retirement plan, such as a 401(k), your ability to deduct Traditional IRA contributions from your taxable income depends on your income level. Even if your contributions are not deductible, a Traditional IRA can still provide tax-deferred growth, making it a tax-advantaged retirement savings tool.

You should also consider future tax rates and inheritance laws. If tax rates rise, having a Roth IRA could be an advantage, as your withdrawals will remain tax-free. A Roth IRA is also beneficial if you plan to leave behind the account for your heirs, as they will not owe taxes on the withdrawals.

To conclude

Both Roth and Traditional IRAs can be good tools for building your retirement savings. You can use them individually or even together, depending on what works best for you. However, you must understand how each one affects your taxes now and in the future. With upcoming tax changes in 2025 and beyond, your strategy might need some adjustments. A financial advisor can help you understand how these changes affect your retirement strategy and find ways to adjust accordingly.

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