Traditional IRA vs Roth IRA: which one fits, and how to switch
A traditional IRA and a Roth IRA both save you tax — just at different moments. Here's who wins with each account, and how to convert without an IRS surprise.
In 2026 you can put up to $7,500 into an IRA, or $8,600 if you are 50 or older — that extra $1,100 is what the IRS calls a catch-up contribution. The question that actually matters is not how much you contribute. It is when you pay tax on that money: today, or the day you retire. That is the whole difference between a traditional IRA and a Roth IRA.
Nicolás Hoyos, who ran finance for a 40-location restaurant group before founding Hoyos Baker, sees the same pattern every season: small business owners who picked an account because “a friend told them to,” and who years later want to switch without knowing the rules. Here is who wins with each one, and how to move from traditional to Roth without triggering a tax bill you did not plan for.
What is the difference between a traditional IRA and a Roth IRA?
With a traditional IRA, the money goes in before tax: you deduct the contribution this year, it grows without annual tax, and in retirement you pay income tax on all of it — what you put in and what it earned.
A Roth IRA works the other way around. You contribute money that has already been taxed, you deduct nothing today, and in retirement you take out contributions and growth completely tax-free. The IRS calls that a qualified distribution, and you get one as long as you are over 59½ and the account has been open five years.
| Traditional IRA | Roth IRA | |
|---|---|---|
| 2026 contribution limit | $7,500 ($8,600 if 50 or older) | $7,500 ($8,600 if 50 or older) |
| Deduction this year | Yes, if you qualify | No |
| Tax in retirement | On everything you take out | None, on qualified withdrawals |
| 2026 income limit to contribute | No limit | Phases out $153,000–$168,000 single; $242,000–$252,000 joint |
| Forced withdrawals | Start at 73 (75 if born in 1960 or later) | Never, for as long as you live |
| Fits you when | Your tax rate is higher today | Your tax rate will be higher later |
Two details that matter in practice:
- Required withdrawals. A traditional IRA forces you to start taking money out at 73 — 75 if you were born in 1960 or later. These are called required minimum distributions, and the IRS publishes the current ages and the math. A Roth never forces you, for as long as you live.
- Income limits. In 2026 the Roth contribution phases out between $153,000 and $168,000 for single filers, and between $242,000 and $252,000 for married filing jointly. The number being measured is your modified adjusted gross income, or MAGI — roughly your adjusted gross income with a few deductions added back. The IRS keeps the current ranges on its Roth IRA page. The traditional IRA has no cap on contributing, but the deduction shrinks if you or your spouse has a retirement plan at work — the IRS publishes the current deduction ranges for that case.
Should you choose a traditional IRA or a Roth IRA?
The rule of thumb: if you think you will pay a higher rate in retirement than you do today, the Roth wins. If you think you will pay less, the traditional wins.
- Go Roth if your business is young and your income is still low, or if you want to leave money to your kids with no tax attached.
- Go traditional if this is a high-income year that will not repeat, or if you plan to retire in a state with no income tax.
- Skip the Roth if you are in the 32% federal bracket or higher today: the tax on converting comes out of money that stops compounding.
- Watch the traditional if you are stacking up enough that required withdrawals push you into a higher bracket at 73.
How to move from a traditional IRA to a Roth without surprises
Switching is called a conversion, and the basic rule fits in one line: the amount you convert counts as ordinary income on that year’s return. There is no income limit and no dollar limit; there is a tax bill, and you decide when and how big. Your custodian reports the move to the IRS on Form 1099-R, so it will show up on your return whether or not you planned for it.
A Roth conversion cannot be undone. The IRS removed the reverse gear in 2018, so the math happens before, not after.
The undo used to be called a recharacterization. It still exists for regular contributions, but it has not applied to conversions since 2018 — which is exactly why the four steps below happen in this order:
- Ask for a direct transfer, custodian to custodian. Never a check in your name: that starts a 60-day clock, and if you miss it the whole thing becomes a withdrawal with a 10% penalty.
- Decline tax withholding. Every dollar the custodian holds back never reaches the Roth and counts as an early withdrawal. Pay the tax with money from outside the account.
- Convert in slices. With $120,000 in the traditional IRA, converting all at once can move you from 22% to 32%. Converting $30,000 a year for four years, filling your bracket without spilling over, costs far less.
- Adjust your fourth-quarter estimated payment. A conversion comes with no withholding attached; if you do not cover it, you will pay interest in April.
What mistakes trigger a tax bill on a Roth conversion?
The pro-rata rule. This one governs every backdoor Roth — the move where you contribute to a traditional IRA without deducting it, then convert. The IRS treats all of your traditional, SEP and SIMPLE IRAs as a single pool and taxes each conversion in that same proportion, so you cannot pick out only the dollars that were already taxed. With $6,000 of non-deductible contributions and $54,000 of deductible money across your IRAs, converting $6,000 comes out 90% taxable, because the already-taxed dollars are only 10% of the $60,000 total. You track it on Form 8606 every year; if you do not keep that filing current, the IRS assumes all of it is taxable.
The two five-year clocks. These are different rules and they get mixed up constantly. The first starts when you opened your very first Roth and decides whether your earnings come out tax-free — one clock, once, covering every Roth you own. The second runs separately on each conversion and decides whether that converted amount comes out penalty-free. Take a conversion out inside its five years while you are under 59½ and you owe the 10% penalty, even though you already paid the tax on it. Once you are past 59½, the conversion clock stops mattering.
The deadline is December 31, not April 15. Waiting until December to see your real income works, but your custodian needs business days.
The side effects. The extra income can shrink your ACA premium tax credit if you buy health insurance on the marketplace, trigger an IRMAA surcharge — the Income-Related Monthly Adjustment Amount — on your Medicare Part B and Part D premiums two years later, or make part of your Social Security benefit taxable. All of it belongs in the math. The IRS lays out the underlying rules in Publication 590-A for contributions and Publication 590-B for withdrawals.
What we tell clients
Before we convert a single dollar, we build a two-year projection: your current bracket, how much room is left in it, which IRAs hold non-deductible contributions, and which side effects switch on. Most clients convert in slices between October and December and never think about it again.
This is general information, not personalized tax advice for your situation — that part is what the call is for. If you want that projection, book a call and bring your last return and statements for every IRA you hold; you can also see how we work on our tax service, or read our breakdown of the QBI deduction if you are weighing this against other year-end moves.
