Traditional and Roth Individual Retirement Accounts (IRAs): A Primer

In response to concerns over the adequacy of retirement savings, Congress has created incentives to encourage individuals to save for retirement through a variety of retirement plans. Some retirement plans are employer-sponsored, such as 401(k) plans, and others are established by individual employees, such as Individual Retirement Accounts (IRAs). This report describes the primary features of two common retirement savings accounts that are available to workers for independently saving a portion of their wages or to individuals rolling over savings from employer-sponsored plans—traditional IRAs and Roth IRAs. Individuals may roll over eligible distributions from other retirement accounts (such as an account balance from a 401(k) plan upon leaving an employer) into IRAs. Rollovers preserve retirement savings by allowing investment earnings on the funds in the retirement accounts to accrue on a tax-deferred basis, in the case of traditional IRAs, or a tax-free basis, in the case of Roth IRAs. Most inflows to Roth IRAs are from contributions and conversions; in contrast, most inflows to traditional IRAs are from rollovers. Both traditional and Roth IRAs offer tax incentives to encourage individuals to save for retirement. Although the accounts have many features in common, they differ in some important aspects, such as deductibility, eligibility to contribute, and tax treatment. Contributions to traditional IRAs may be tax deductible for taxpayers who (1) are not covered by a retirement plan at their place of employment or (2) have income below specified limits. Contributions to Roth IRAs are not tax deductible and eligibility is limited to those with incomes under specified limits. The tax treatment of distributions from traditional and Roth IRAs differs. Distributions from traditional IRAs are generally included in taxable income, whereas qualified distributions from Roth IRAs are not included in taxable income. Some distributions from both may be subject to an additional 10% tax penalty, unless the distribution is for a reason specified in the Internal Revenue Code (e.g., distributions from IRAs after the individual is age 59½ or older are not subject to the early withdrawal penalty). This report explains IRAs’ eligibility requirements, contribution limits, tax deductibility of contributions, and withdrawal rules. It also describes the Retirement Savings Contribution Credit (also known as the Saver’s Credit), which is a nonrefundable tax credit available to individuals with income under specified limits who make IRA (or other retirement plan) contributions. Starting in 2027, a Saver’s Match will replace the Saver’s Credit, per a provision in the SECURE 2.0 Act of 2022 (Division T of P.L. 117-328). The report provides data on assets in, contributions to, and ownership of IRAs.