Individual Retirement Accounts (IRAs) are among the most powerful tools available for building long-term wealth. They offer tax advantages that can dramatically accelerate your retirement savings, allowing your money to compound more efficiently than in taxable brokerage accounts. But choosing between a Roth IRA and a Traditional IRA is not always straightforward. The decision hinges on a fundamental trade-off: pay taxes now or pay taxes later.
A Traditional IRA gives you an immediate tax deduction. The money you contribute reduces your current taxable income, lowering your tax bill today. Your investments grow tax-deferred, meaning you do not pay taxes on dividends, interest, or capital gains along the way. When you withdraw money in retirement, you pay ordinary income tax on everything you take out.
A Roth IRA works in reverse. You contribute after-tax dollars, so you get no immediate tax break. Your investments grow tax-free, and when you withdraw in retirement, you pay nothing -- no taxes on contributions, no taxes on earnings, no taxes on capital gains. Every dollar you withdraw is yours to keep.
This simple difference -- tax now vs. tax later -- can mean hundreds of thousands of dollars over a lifetime of saving. But the right choice depends on your age, income, current tax bracket, and expectations for future tax rates. In this comprehensive guide, we will break down every aspect of both account types, show you how to decide based on your situation, and explain advanced strategies like Roth conversions.
The Short Version
Choose Roth IRA if you are young, in a low tax bracket now, or expect higher tax rates in retirement. Choose Traditional IRA if you are older, in a high tax bracket now, or expect lower tax rates in retirement. Both have the same contribution limit ($7,000 or $8,000 if 50+). Roth has no income limits for conversions and no RMDs. Traditional offers immediate tax deductions. If you cannot decide, split contributions between both.
The Fundamental Tax Difference: Pay Now or Pay Later
The core distinction between Roth and Traditional IRAs is tax timing. Understanding this difference is essential because every other feature flows from it.
Traditional IRA: Tax Break Now, Tax Later
With a Traditional IRA, you contribute pre-tax dollars. If you earn $60,000 and contribute $6,000 to a Traditional IRA, the IRS only sees $54,000 of taxable income for that year. You save taxes at your marginal rate. If you are in the 22% tax bracket, that $6,000 contribution saves you $1,320 in taxes immediately.
Inside the account, your investments grow tax-deferred. You do not pay taxes on dividends, interest, or capital gains each year. All earnings remain in the account, compounding without the drag of annual taxation.
When you withdraw money in retirement, every dollar is taxed as ordinary income at your retirement tax rate. If you withdraw $40,000 per year and are in the 15% bracket, you pay $6,000 in taxes on those withdrawals.
Roth IRA: Pay Now, Tax-Free Later
With a Roth IRA, you contribute after-tax dollars. If you earn $60,000 and contribute $6,000 to a Roth IRA, you still pay taxes on the full $60,000. You get no immediate tax deduction.
However, your investments grow tax-free, not just tax-deferred. This is a crucial distinction. In a Traditional IRA, earnings are only tax-deferred -- you will pay taxes eventually. In a Roth IRA, earnings are completely tax-free. Forever.
When you withdraw money in retirement, you pay zero taxes. Not on your original contributions (you already paid those). Not on the growth. Not on the capital gains. Every dollar comes out 100% tax-free. This tax-free growth can generate enormous wealth over decades.
Math Example: The Power of Tax-Free Growth
Let us look at a concrete example to see how this plays out. Suppose you invest $6,000 per year for 40 years, earning an average 7% annual return. We will compare the Traditional and Roth approaches assuming a 22% tax rate now and a 15% tax rate in retirement.
| Factor | Traditional IRA | Roth IRA |
|---|---|---|
| Annual contribution | $6,000 (pre-tax) | $6,000 (after-tax) |
| Investment period | 40 years | 40 years |
| Average annual return | 7% | 7% |
| Ending balance | $1,197,800 | $1,197,800 |
| Tax paid on withdrawal (15%) | -$179,670 | $0 |
| Net amount after tax | $1,018,130 | $1,197,800 |
| Additional amount with Roth | - | +$179,670 |
In this example, the Roth IRA delivers $179,670 more in spendable wealth after taxes. The Roth wins because the tax rate in retirement (15%) is lower than the current tax rate (22%), and all that extra growth compounds tax-free. The advantage would be even larger if your retirement tax rate were equal to or higher than your current rate.
The Break-Even Tax Rate
To decide which account is better for you, compare your current marginal tax rate with your expected retirement marginal tax rate. The general rule:
- If your retirement tax rate will be LOWER than your current rate: Traditional IRA is generally better (you pay less tax later than you would save now)
- If your retirement tax rate will be HIGHER than your current rate: Roth IRA is better (you pay less tax now than you would pay later)
- If the rates will be EQUAL: Both are mathematically equivalent, but Roth still offers flexibility (no RMDs, tax diversification)
Roth vs Traditional IRA: Complete Feature Comparison
Beyond the tax timing difference, Roth and Traditional IRAs have several other important distinctions. Here is the complete breakdown:
| Feature | Traditional IRA | Roth IRA |
|---|---|---|
| Tax treatment of contributions | Tax-deductible (generally) | After-tax, no deduction |
| Tax treatment of earnings | Tax-deferred | Tax-free |
| Tax treatment of withdrawals | Taxed as ordinary income | 100% tax-free (qualified) |
| Contribution limit (2026) | $7,000 ($8,000 if 50+) | $7,000 ($8,000 if 50+) |
| Income limits for contributions | None (if no workplace plan) | Yes (see below) |
| Required Minimum Distributions (RMDs) | Yes, starting at age 73 | No, during your lifetime |
| Early withdrawal penalty (before 59 1/2) | 10% penalty + taxes (exceptions apply) | 10% penalty + taxes on earnings only (exceptions apply) |
| Can withdraw contributions anytime? | No, contributions are pre-tax | Yes, contributions always accessible penalty-free |
| Five-year rule for tax-free earnings | No | Yes (account must be open 5 years) |
| Best for | High earners, expect lower taxes in retirement, need tax deduction now | Young investors, expect higher taxes in retirement, want tax flexibility |
Contribution Limits for 2026
Roth and Traditional IRAs share the same contribution limits set by the IRS. For 2026, the limits are:
| Year | Under Age 50 | Age 50 or Older |
|---|---|---|
| 2026 | $7,000 | $8,000 |
Important points about contribution limits:
- The $7,000/$8,000 limit is the total you can contribute across ALL your IRA accounts combined. You cannot contribute $7,000 to a Roth and another $7,000 to a Traditional. The combined total cannot exceed the limit.
- You can split contributions between Roth and Traditional however you like. For example, $3,500 to Roth and $3,500 to Traditional, or any other combination.
- You must have earned income (wages, salary, self-employment income) to contribute. Investment income, Social Security, and rental income do not count. The maximum you can contribute is the lesser of the annual limit or your total earned income for the year.
- Contributions for a given tax year can be made until the tax filing deadline (usually April 15 of the following year). You can contribute for 2026 until April 15, 2027.
- The contribution limit is indexed to inflation and typically increases every few years in $500 increments.
Income Limits for Roth IRA Contributions
This is where Roth and Traditional IRAs diverge significantly. Roth IRAs have income limits that phase out and eventually eliminate your ability to contribute directly. Traditional IRAs generally do not have income limits if you do not have a workplace retirement plan.
Roth IRA Income Limits for 2026
| Filing Status | Full Contribution | Partial Contribution | No Contribution |
|---|---|---|---|
| Single / Head of Household | MAGI < $161,000 | $161,000 - $176,000 | MAGI ≥ $176,000 |
| Married Filing Jointly | MAGI < $240,000 | $240,000 - $250,000 | MAGI ≥ $250,000 |
| Married Filing Separately | MAGI < $10,000 | $10,000 - $10,000 | MAGI ≥ $10,000 |
MAGI stands for Modified Adjusted Gross Income, which is your AGI with certain deductions added back (like student loan interest and IRA contributions). Use the worksheet in IRS Publication 590-A to calculate your MAGI precisely.
If your income falls in the "partial contribution" range, you can contribute a reduced amount. The IRS provides a worksheet to calculate your exact limit. As a rough rule, if you are halfway through the phase-out range, your contribution limit is about half the normal amount.
Traditional IRA Income Limits
Traditional IRA income limits are more complex because they depend on whether you (or your spouse) have access to a workplace retirement plan like a 401(k).
| Filing Status | Workplace Plan? | Full Deduction | Partial Deduction | No Deduction |
|---|---|---|---|---|
| Single / Head of Household | No workplace plan | Any income | N/A | Never |
| Single / Head of Household | Covered by plan | MAGI < $81,000 | $81,000 - $95,000 | MAGI ≥ $95,000 |
| Married Filing Jointly | Neither covered | Any income | N/A | Never |
| Married Filing Jointly | One spouse covered | MAGI < $228,000 | $228,000 - $238,000 | MAGI ≥ $238,000 |
| Married Filing Jointly | Both covered | MAGI < $136,000 | $136,000 - $146,000 | MAGI ≥ $146,000 |
If you do not get a tax deduction for Traditional IRA contributions because of income limits, you can still contribute. You just make nondeductible contributions. These contributions are tracked separately on IRS Form 8606 and are not taxed again when you withdraw them.
Withdrawal Rules and Early Withdrawal Penalties
Both Roth and Traditional IRAs have rules about when you can withdraw money without penalty. Understanding these rules is critical because they affect your financial flexibility.
Traditional IRA Withdrawal Rules
Withdrawals from a Traditional IRA are taxed as ordinary income at your marginal rate in the year of withdrawal. Before age 59 1/2, withdrawals also trigger a 10% early withdrawal penalty on top of taxes. This penalty exists to encourage you to keep the money invested for retirement.
However, there are several exceptions to the 10% penalty. You can avoid the penalty (but not the taxes) if you use the money for:
- First-time home purchase: Up to $10,000 for buying, building, or rebuilding a first home
- Qualified education expenses: Tuition, fees, books, supplies, and room and board for yourself, spouse, children, or grandchildren
- Unreimbursed medical expenses: Amounts exceeding 10% of your adjusted gross income
- Health insurance premiums: While unemployed for at least 12 weeks
- Disability: If you are totally and permanently disabled
- Death: Withdrawals to a beneficiary after your death
- IRS levy: To pay an IRS tax levy
- Substantially equal periodic payments: A series of substantially equal payments over your life expectancy (Section 72(t) withdrawals)
Roth IRA Withdrawal Rules
Roth IRA withdrawal rules are more complex because withdrawals come from different "buckets" with different tax treatments. Roth IRAs follow an ordering rule for withdrawals:
- First: Your regular contributions (always tax-free and penalty-free, anytime)
- Second: Conversion contributions from Traditional IRAs (tax-free but may have 5-year rule)
- Last: Earnings (tax-free and penalty-free only after age 59 1/2 AND the 5-year rule is met)
This ordering rule means you can always withdraw your Roth contributions tax-free and penalty-free at any time, for any reason. You already paid taxes on this money, so the IRS has no claim on it. This is a huge advantage for emergency savings and financial flexibility.
However, withdrawing earnings before age 59 1/2 or before meeting the five-year rule triggers taxes and the 10% penalty on the earnings portion. The same exceptions that apply to Traditional IRAs (first home, education, medical, etc.) also apply to Roth IRA earnings withdrawals.
The Roth IRA Five-Year Rule
The five-year rule is a critical Roth IRA concept that often confuses people. Here is how it works:
To withdraw earnings tax-free, you must satisfy both conditions:
- Be at least age 59 1/2, AND
- Have at least one Roth IRA open for five tax years
The five-year period starts on January 1 of the tax year when you made your first Roth contribution. It does not restart for each contribution. Once you have satisfied the five-year rule, it is satisfied forever for all Roth IRAs you own.
Example: You open your first Roth IRA and contribute in April 2026 (for tax year 2026). The five-year clock starts on January 1, 2026. It ends on December 31, 2030. Starting January 1, 2031, if you are also age 59 1/2 or older, all withdrawals are completely tax-free, including earnings.
Required Minimum Distributions (RMDs)
RMDs are mandatory withdrawals the IRS requires you to take from certain retirement accounts once you reach a certain age. The purpose is to ensure you eventually pay taxes on tax-deferred accounts like Traditional IRAs and 401(k)s.
Traditional IRA RMDs
Traditional IRAs have RMDs. As of 2026, you must start taking RMDs at age 73 (changed from 72 by the SECURE 2.0 Act of 2022). Each year, you must withdraw a minimum amount calculated based on your account balance and your life expectancy using IRS tables.
The penalty for failing to take your RMD is severe: 25% of the amount you should have withdrawn (reduced to 10% if you correct the mistake promptly). This penalty was increased from 10% to 25% by the SECURE 2.0 Act.
RMDs continue for as long as you live, and the percentage you must withdraw increases each year as you get older. By your late 80s, you may be required to withdraw 5-6% or more of your balance annually.
Roth IRA RMDs
Roth IRAs have no RMDs during your lifetime. This is one of their biggest advantages. You can leave the money invested for as long as you want, allowing it to continue growing tax-free indefinitely. Many people use Roth IRAs as legacy assets for their heirs.
However, Roth IRAs do have RMD rules for beneficiaries. If you inherit a Roth IRA, you must withdraw all money within 10 years (for most non-spouse beneficiaries under the SECURE Act). While these withdrawals are generally tax-free, the forced timeline can limit the growth potential.
Who Should Choose a Roth IRA?
Roth IRAs are ideal for specific situations and demographics. Here is who typically benefits most from choosing a Roth IRA:
Young Investors and Early Career
If you are in your 20s or early 30s, your income and tax rate are likely lower now than they will be later in your career. Paying taxes at today's low rate and enjoying tax-free growth for decades is mathematically advantageous. A 25-year-old in the 12% tax bracket contributing $6,000 annually until age 65 could have over $1 million tax-free -- an enormous advantage over a Traditional IRA that would be taxed at retirement.
Those Expecting Higher Taxes in Retirement
If you expect your tax rate to be higher in retirement than it is now, a Roth IRA is the clear winner. Why? You lock in today's lower tax rate on contributions and avoid future higher taxes on withdrawals. Given the rising national debt and demographic pressures, many experts believe tax rates will increase in the future, making Roth accounts more valuable.
People Who Want Tax Flexibility
Roth IRAs offer unparalleled tax flexibility. You can withdraw contributions anytime tax-free and penalty-free, making them effective emergency funds. You are not forced to take RMDs, so you can leave money invested for as long as you want. In retirement, tax-free withdrawals give you control over your taxable income, which can help manage Social Security taxation, Medicare premiums, and other means-tested benefits.
High Earners Using the Backdoor Roth
If your income is too high to contribute directly to a Roth IRA, you can use the "backdoor Roth" strategy: contribute to a Traditional IRA (nondeductible if you are also covered by a workplace plan), then immediately convert to a Roth. There are no income limits for conversions. This allows high earners to access Roth benefits, though you must handle the tax consequences of the conversion carefully.
Those Planning to Leave Money to Heirs
Roth IRAs are excellent estate planning tools. Beneficiaries inherit Roth accounts tax-free (though subject to the 10-year withdrawal rule for most non-spouses). This can be a significant legacy, especially compared to Traditional IRAs that would generate income tax for heirs. However, recent tax law changes have reduced the "stretch IRA" benefit, so consult a financial planner for estate planning specifics.
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Traditional IRAs are better for different situations. Here is who typically benefits most from choosing a Traditional IRA:
High Earners Seeking Tax Deductions
If you are in a high tax bracket now (say, 32% or 35%), the tax deduction from a Traditional IRA is valuable. It immediately reduces your taxable income, saving you thousands in taxes. Even if your retirement tax rate is somewhat lower, the immediate tax benefit can outweigh the future tax cost, especially if you invest the tax savings elsewhere.
Those Expecting Lower Taxes in Retirement
If you expect your income and tax rate to be significantly lower in retirement than they are now, a Traditional IRA is mathematically superior. You get a tax break at today's higher rate and pay taxes at tomorrow's lower rate. This is common for people who will have lower expenses, paid-off mortgages, or other sources of income (like a pension) in retirement.
People Who Need Immediate Tax Relief
If you are struggling with a high tax bill this year, a Traditional IRA contribution can provide immediate relief. The deduction reduces your taxable income, potentially dropping you into a lower tax bracket. This can be especially valuable in high-income years, such as when you receive a large bonus or exercise stock options.
Those With No Workplace Plan and Low Income
If you do not have access to a 401(k) or similar plan, Traditional IRA contributions are fully deductible regardless of income. For low- and moderate-income earners, the tax deduction can be valuable. However, if you are in a very low tax bracket (10% or 12%), the immediate tax savings may be minimal, and a Roth might still be better for tax-free growth.
Older Workers Near Retirement
If you are within 10-15 years of retirement, you have less time for tax-free growth to compound. The immediate tax deduction may be more valuable than future tax-free withdrawals, especially if you expect to be in a similar or lower tax bracket in retirement. Additionally, RMDs starting at age 73 may be less concerning if you plan to withdraw money in retirement anyway.
Choosing by Age and Income Level
The Roth vs. Traditional decision often changes based on your age and income level. Here are general guidelines for different life stages and income levels:
| Age Range | Typical Recommendation | Why |
|---|---|---|
| 20s (Early Career) | Roth IRA | Low tax bracket now, long time for tax-free growth, income likely to increase, tax rates may rise |
| 30s (Career Building) | Mostly Roth | Still likely in lower bracket than retirement, 30+ years of growth potential, Roth flexibility valuable |
| 40s (Peak Earnings) | Split or Traditional | Higher income now, may be in peak tax bracket, consider splitting for tax diversification |
| 50s (Pre-Retirement) | Traditional or Split | Less time for growth, may need tax deduction, RMDs approaching, consider income needs in retirement |
| 60s (Near/In Retirement) | Traditional or Conversions | RMDs starting soon, consider Roth conversions in low-income years, manage taxable income |
| Income Level | Typical Recommendation | Considerations |
|---|---|---|
| Low Income (<$50k) | Roth IRA | Low tax bracket now, likely to retire at similar or higher rate, tax-free growth valuable |
| Moderate Income ($50k-$100k) | Roth IRA or Split | Consider current vs. future tax rate, split for diversification, Roth if young |
| High Income ($100k-$200k) | Traditional or Split | High tax bracket now, immediate deduction valuable, consider backdoor Roth |
| Very High Income (>$200k) | Backdoor Roth | Roth contributions phased out, Traditional may not be deductible, use backdoor Roth strategy |
The Benefits of Tax Diversification
If you cannot decide between Roth and Traditional, or if you are unsure about future tax rates, consider splitting your contributions between both. This strategy, called tax diversification, gives you flexibility in retirement to manage your taxable income.
In retirement, you can decide which account to withdraw from based on your needs. If you have a low-income year, withdraw from Traditional to fill low tax brackets. If you have a high-income year, withdraw from Roth to avoid pushing yourself into a higher bracket. You can also use Roth withdrawals to manage Social Security taxation and Medicare premiums.
A common split is 50/50 or 60/40 (Roth/Traditional), but the right mix depends on your situation. Younger investors might lean 80/20 or 90/10 toward Roth, while older workers might tilt more toward Traditional.
Tax diversification also protects against legislative risk. If tax laws change dramatically in the future, having both account types gives you options regardless of what happens.
Roth Conversions: Turning Traditional into Roth
A Roth conversion is when you move money from a Traditional IRA to a Roth IRA. You must pay income taxes on the converted amount in the year of conversion, but the money then grows tax-free in the Roth. There are no income limits or penalties for conversions.
When to Consider a Roth Conversion
Roth conversions make sense in specific situations:
- Low-income year: If your income is temporarily low (between jobs, business loss, sabbatical), convert Traditional to Roth when your tax rate is low. You pay less tax now and enjoy tax-free growth later.
- Early retirement: Before required minimum distributions begin, you have a window in your early 60s when your income might be low. This is an ideal time for Roth conversions to fill lower tax brackets.
- Market downturn: If your Traditional IRA value has dropped due to market decline, convert to Roth at a lower value, pay less tax, and benefit from the recovery in a tax-free account.
- Backdoor Roth for high earners: If your income exceeds Roth contribution limits, contribute to a Traditional IRA (nondeductible) and immediately convert to Roth. However, watch out for the pro-rata rule if you have other Traditional IRA funds.
- Estate planning: Converting to Roth before death can provide tax-free assets for heirs, though consider the 10-year withdrawal rule for beneficiaries.
The Pro-Rata Rule Warning
If you have both pre-tax and after-tax money in Traditional IRAs, conversions follow the pro-rata rule. You cannot cherry-pick which funds to convert. Instead, the conversion consists of a proportionate mix of all your Traditional IRA balances, weighted by their tax basis.
Example: You have $90,000 in pre-tax Traditional IRA funds and $10,000 in nondeductible contributions (after-tax basis). If you convert $20,000, 90% ($18,000) is taxed as income, and 10% ($2,000) is tax-free. You cannot convert just the $10,000 after-tax portion.
To work around the pro-rata rule, roll pre-tax Traditional IRA funds into a 401(k) if possible, leaving only after-tax funds for conversion.
Five-Year Rule for Conversions
Each Roth conversion has its own five-year clock for penalty-free withdrawals of the converted amount. To withdraw converted funds penalty-free before age 59 1/2, the conversion must be at least five years old. However, unlike the contribution five-year rule, this clock applies separately to each conversion.
Frequently Asked Questions
What is the difference between Roth IRA and Traditional IRA?
The main difference is tax treatment. Traditional IRA contributions are tax-deductible now, reducing your current taxable income, but you pay taxes on withdrawals in retirement. Roth IRA contributions are made with after-tax dollars (no immediate tax break), but withdrawals in retirement are completely tax-free. This is the fundamental trade-off: pay taxes now vs. pay taxes later.
Should I choose Roth IRA or Traditional IRA?
Choose Roth IRA if you expect to be in a higher tax bracket in retirement than you are now, or if you want tax flexibility and no RMDs. Choose Traditional IRA if you expect to be in a lower tax bracket in retirement, or if you need an immediate tax deduction. Younger workers typically benefit more from Roth, while higher earners or those near retirement often prefer Traditional.
What are the income limits for Roth IRA contributions?
For 2026, you can contribute the full amount to a Roth IRA if your modified adjusted gross income (MAGI) is under $161,000 for single filers or $240,000 for married filing jointly. Contributions phase out between $161,000-$176,000 for single and $240,000-$250,000 for married. Above these limits, you cannot contribute directly to a Roth IRA, though a backdoor Roth conversion may be an option.
What are the contribution limits for IRAs in 2026?
The total contribution limit for all IRAs combined (Roth + Traditional) is $7,000 for 2026, or $8,000 if you are age 50 or older (catch-up contribution). This is the maximum you can contribute across all your IRA accounts, not per account. Both Roth and Traditional share the same annual limit.
Do I have to take required minimum distributions (RMDs) from a Roth IRA?
No. Roth IRAs do not have required minimum distributions during your lifetime, allowing your money to continue growing tax-free for as long as you live. Traditional IRAs do have RMDs, which begin at age 73 and require you to withdraw a specific percentage each year based on your life expectancy and account balance.
What is the Roth IRA five-year rule?
The Roth IRA five-year rule states that you must have had a Roth IRA open for at least five tax years before you can take qualified tax-free distributions of earnings. The five-year period starts on January 1 of the tax year when you made your first Roth contribution. If you are under 59 1/2 and withdraw earnings before five years, you may face taxes and penalties. After five years and age 59 1/2, all withdrawals are tax-free.
Can I convert a Traditional IRA to a Roth IRA?
Yes, you can convert a Traditional IRA to a Roth IRA through a Roth conversion. You will owe income taxes on the converted amount (the full balance, not just earnings) in the year of conversion. There are no income limits or penalties for conversions. This strategy, called a backdoor Roth, allows high earners to access Roth benefits, but you need to consider the upfront tax cost and your current vs. future tax bracket.
What are the early withdrawal penalties for IRAs?
Before age 59 1/2, withdrawals from IRAs generally trigger a 10% early withdrawal penalty plus income taxes. However, exceptions exist: first-time home purchase ($10,000 limit), qualified education expenses, unreimbursed medical expenses exceeding 10% of AGI, health insurance premiums while unemployed, disability, death, and substantially equal periodic payments. Roth contributions can be withdrawn penalty-free at any time since you already paid taxes on them.
Can I contribute to both Roth and Traditional IRA?
Yes, but your total contributions across both account types cannot exceed the annual limit ($7,000 or $8,000 if 50+). For example, you could contribute $3,500 to a Roth and $3,500 to a Traditional. Splitting contributions is a tax diversification strategy that gives you flexibility in retirement to manage your taxable income by choosing which account to withdraw from.
What happens if I withdraw from my Roth IRA before five years?
If you withdraw before meeting the five-year rule, your contributions come out first and are always tax-free and penalty-free. However, any earnings you withdraw before five years (and before age 59 1/2) are subject to both income tax and the 10% early withdrawal penalty. The five-year rule only applies to earnings, not contributions. Once you satisfy the five-year rule and reach age 59 1/2, all withdrawals are completely tax-free.
Is a Roth IRA better than a 401(k)?
Roth IRAs and 401(k)s serve different purposes and are not mutually exclusive. A 401(k) typically has much higher contribution limits ($23,000 or $30,500 if 50+ in 2026) and often includes employer matching, which is free money you should never leave on the table. Roth IRAs offer more investment flexibility (no plan restrictions) and no RMDs. Ideally, contribute enough to get your full employer match, then consider maxing a Roth IRA, then return to your 401(k) if you have more to save.
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