Pay Tax Now or Pay Tax Later

The difference between a traditional IRA and a Roth IRA comes down to when you pay tax. Traditional IRA contributions may be tax-deductible, the money grows tax-deferred, and withdrawals in retirement are taxed as ordinary income. Roth IRA contributions are made with after-tax money, and qualified withdrawals in retirement, including all the growth, are completely tax-free.

For 2026, the combined contribution limit across all of a person’s IRAs is $7,500, with an extra $1,100 catch-up contribution for those aged 50 or older. Contributions for a tax year can be made until the tax filing deadline the following April, which makes the first months of every year one of the busiest times for IRA decisions.

Advisers face this choice with clients constantly, and the Series 65 tests it as part of retirement planning. For the full route from the exam to a career in advice, our complete guide to how to become an investment adviser representative covers every step.

Your January exam game plan starts here: explore every FRC playlist on YouTube

How a Traditional IRA Works

Anyone with earned income can contribute to a traditional IRA, and since 2020 there has been no upper age limit for contributions. A spouse without earned income can also contribute through a spousal IRA, based on the working spouse’s income.

Whether the contribution is deductible depends on income and whether the saver or their spouse is covered by a workplace retirement plan. For 2026, a single filer covered by a workplace plan gets a full deduction below $81,000 of modified adjusted gross income, a partial deduction between $81,000 and $91,000, and none above that.

Money inside the account grows tax-deferred. Withdrawals are taxed as ordinary income, and those taken before age 59½ generally face a 10 percent additional tax unless an exception applies. The Series 65 Exam Preparation course at FRC covers IRAs, employer plans and the tax rules the exam expects you to apply.

How a Roth IRA Works

A Roth IRA reverses the timing. Contributions are never deductible, but qualified withdrawals are entirely tax-free, including decades of investment growth.

A withdrawal is qualified when the account has been open for at least five years and the owner is 59½ or older, disabled, deceased, or using up to $10,000 for a first home purchase. Contributions themselves can be withdrawn at any time without tax or penalty, because tax has already been paid on them.

Eligibility depends on income. For 2026, the ability to contribute phases out between $153,000 and $168,000 of modified adjusted gross income for single filers and between $242,000 and $252,000 for married couples filing jointly.

Traditional IRA vs Roth IRA at a Glance

Worked Example: Same Return, Different Tax Rates

A saver in the 24 percent tax bracket has $7,500 of pre-tax income to put toward retirement. The investments will earn 7 percent a year for 30 years, which multiplies any amount by about 7.61.

Step one: the traditional route. The full $7,500 goes in, grows to about $57,090, and is taxed on withdrawal. Step two: the Roth route. Paying 24 percent tax first leaves $5,700 to invest, which grows to about $43,390, all tax-free.

Step three: compare at different retirement tax rates. If the saver’s retirement rate is also 24 percent, the traditional account leaves about $43,390 after tax, exactly the same as the Roth. If the rate falls to 12 percent, the traditional account leaves about $50,240, and if it rises to 32 percent, it leaves only about $38,820.

Step four: draw the rule. When tax rates are the same now and later, the two accounts produce the same result. A traditional IRA wins if the saver expects a lower tax rate in retirement, and a Roth wins if they expect a higher one.

Deadlines That Matter at the Start of the Year

IRA contributions for a tax year can be made up to the federal tax filing deadline the following year, normally April 15. That means contributions for 2026 can still be made in the first months of 2027, and the saver must tell the account provider which year each contribution counts toward.

The new year also brings a new limit. The IRS usually announces the following year’s figures each autumn, so savers and advisers should confirm the 2027 limits before making contributions for the new tax year.

Timing matters for growth. A saver who contributes in January rather than waiting until the following April gives the money up to 15 extra months in the market, and over decades that head start adds up.

Early Withdrawal Exceptions

The 10 percent additional tax on early withdrawals from a traditional IRA, and on Roth earnings that are not qualified, has a list of exceptions. These include death, disability, up to $10,000 for a first home, qualified higher education expenses and unreimbursed medical expenses above a set share of income.

Other exceptions cover health insurance premiums paid while unemployed, a series of substantially equal periodic payments taken over the owner’s life expectancy, and up to $5,000 for the birth or adoption of a child. An exception removes the penalty but not the ordinary income tax on taxable amounts.

Exam questions often present one of these situations and ask whether the penalty applies. Knowing the list, and remembering that Roth contributions are never penalised, answers most of them.

Required Minimum Distributions

Traditional IRA owners must begin taking required minimum distributions once they reach age 73, a threshold set by the SECURE 2.0 Act and scheduled to rise to 75 in 2033. Each year’s minimum is based on the account balance and a life expectancy factor, and missing it triggers an excise tax.

Roth IRAs have no required minimum distributions during the original owner’s lifetime. The money can keep growing tax-free for as long as the owner lives, which makes the Roth a powerful tool for estate planning.

Workplace Roth accounts follow the same principle. Since 2024, a Roth 401(k) also has no lifetime required distributions for the original owner, removing an old reason to roll it into a Roth IRA.

Inherited IRAs

When an IRA owner dies, a surviving spouse can generally treat the account as their own. Most other beneficiaries must empty an inherited IRA within ten years under the rules introduced by the SECURE Act of 2019.

Withdrawals from an inherited traditional IRA are taxed as ordinary income to the beneficiary, while withdrawals from an inherited Roth IRA are generally tax-free if the five-year requirement has been met. That difference makes the Roth especially valuable for leaving money to children or grandchildren.

Roth Conversions and the Backdoor Roth

Money in a traditional IRA can be converted to a Roth IRA at any time, regardless of income. The amount converted, apart from any after-tax contributions, is added to taxable income for the year, after which the money grows tax-free in the Roth.

Conversions can make sense in a low-income year, such as early retirement before Social Security begins, or when the saver expects higher tax rates later. Each conversion starts its own five-year clock for penalty purposes if the owner is under 59½.

High earners who exceed the Roth income limits sometimes use a backdoor Roth: they make a non-deductible traditional IRA contribution and then convert it. If they hold other pre-tax IRA money, the pro-rata rule makes part of the conversion taxable, so the strategy needs careful planning.

Study Retirement Planning With FRC

Retirement accounts are a core part of the client recommendations section of the exam, and the rules change regularly. Our Series 65 course takes you through IRAs, employer plans, required distributions and conversions step by step, with the current figures and the suitability judgment the exam tests.

Consider studying with FRC for every exam on your route. Explore our USA exam courses, from the SIE through the Series 7, Series 63 and Series 65.

To take advantage of the membership, explore FRC Professional Membership, which gives you a verified Digital Profile that shows employers your real-time course progress, together with the Video Resume. Current offers are on our membership deals page.

What You Can Hold in Either IRA

Both types of IRA can hold the same range of investments: individual stocks and bonds, mutual funds, exchange-traded funds, certificates of deposit and more. Collectibles and life insurance are prohibited, and certain transactions with the owner or family members are banned.

The account type changes the tax treatment, not the investments. That makes asset allocation across accounts an important planning decision: assets expected to grow the most are often placed in a Roth, where the growth is never taxed.

Because both accounts compound over decades, starting early matters more than any single investment choice. Our compound interest entry shows how time multiplies the value of each contribution.

Rollovers and the Adviser’s Duty

Clients changing jobs often face a choice about their old employer plan: leave it, move it to a new employer’s plan, roll it into an IRA or cash it out. A direct rollover from a pre-tax 401(k) to a traditional IRA, or from a Roth 401(k) to a Roth IRA, keeps the tax treatment intact.

Recommendations to roll over retirement assets are closely regulated because they often move money into accounts that pay the adviser or firm. Broker-dealers must meet Regulation Best Interest, and investment advisers owe a fiduciary duty, so the recommendation must weigh fees, investment options and services in both accounts.

Our FINRA rules quick reference on duties and conflicts places these obligations alongside the other conduct rules. A rollover that leaves the client paying more for less is difficult to justify under either standard.

The Memory Aid

Remember this line: traditional means tax later, Roth means tax now. Whichever the client chooses, the tax is paid once, either on the way in or on the way out.

For the choice, remember to compare today’s tax rate with tomorrow’s. A higher rate expected in retirement favours the Roth, and a lower one favours the traditional IRA.

For the rules, remember five and fifty-nine and a half for qualified Roth withdrawals, and seventy-three for traditional required distributions.

Exam Traps to Avoid

The first trap is applying the Roth income limit to traditional IRA contributions. Anyone with earned income can contribute to a traditional IRA; income affects only whether the contribution is deductible.

The second trap is assuming Roth contributions are locked until 59½. Contributions can always be withdrawn tax- and penalty-free, and only earnings are subject to the qualified distribution rules.

The third trap is giving Roth IRAs required minimum distributions. The original owner never has to take them. The fourth trap is forgetting that the contribution limit is combined: a saver cannot put $7,500 into a traditional IRA and another $7,500 into a Roth IRA for the same year.

A Client Scenario

A 28-year-old client earning $75,000 a year asks whether to open a traditional or Roth IRA in January. She is in the 22 percent bracket today, expects her income to rise significantly as her career develops, and wants flexibility in case she needs money for a first home.

The adviser explains that she is likely to face a higher tax rate later in her career, which favours paying tax now through a Roth. Her contributions would remain accessible without tax or penalty, and up to $10,000 of earnings could be used toward a first home once the account has been open five years.

The adviser recommends the Roth IRA, a diversified portfolio suited to her long time horizon, and contributing early in the year to give the money more time to grow. The recommendation is grounded in her objectives, tax position and risk tolerance, the core of every suitability assessment.

The Dictionary as a Video Library

The FRC dictionary is a study tool, not just a glossary. Every entry pairs a written explanation with deep-dive video, on-page quizzes and interactive flash cards, so you can read a concept, watch it explained and test yourself in one place.

Rules and regulations are covered in the same depth, from Regulation Best Interest to required minimum distributions. Use the FRC dictionary to open every term in this article as its own explanation, video and quiz.

Practice Questions to Test Yourself

Question one: What is the main tax difference between a traditional IRA and a Roth IRA? Traditional IRA contributions may be deductible and withdrawals are taxed, while Roth contributions are made after tax and qualified withdrawals are tax-free.

Question two: What is the 2026 IRA contribution limit for a 52-year-old? $8,600: the $7,500 limit plus the $1,100 catch-up contribution for those aged 50 or older.

Question three: Which IRA requires the original owner to take required minimum distributions? The traditional IRA, starting at age 73. Roth IRAs have no lifetime required distributions.

Question four: A client expects to be in a much higher tax bracket in retirement. Which IRA is generally more favourable? The Roth IRA, because paying tax at today’s lower rate and withdrawing tax-free later produces more after-tax income.

Question five: Can a high earner above the Roth income limit still contribute to a traditional IRA? Yes. There is no income limit on traditional IRA contributions, although the deduction may be reduced or eliminated if the saver is covered by a workplace plan.

Turn Planning Knowledge Into Career Evidence

Retirement planning knowledge sits at the heart of wealth management and financial advice. FRC’s Digital Profile shows employers the courses you are actively studying and the progress you have earned through assessed learning, verified by FRC, and a QR code on your resume takes them straight to it.

The FRC Video Resume lets a hiring manager hear you before the interview. Explaining the traditional versus Roth decision clearly to a client is exactly the kind of conversation an advisory firm wants to see you handle.

Candidates returning to the exam should note that the wait after a third failure drops from 180 days to 60 days for exam windows opened on or after January 4, 2027, as explained in our article on the Series 65 retake rule change.

Related Questions

Continue with Fixed vs Variable Annuity for another tax-deferred retirement vehicle, and What Is a 1035 Exchange? for moving between insurance contracts without tax.

For protection planning, read Term vs Whole Life Insurance, and for fund costs inside an IRA, read Rights of Accumulation vs Letter of Intent.

Key Points to Retain

A traditional IRA offers a possible deduction now, tax-deferred growth and taxable withdrawals, with required minimum distributions from age 73. A Roth IRA offers no deduction but tax-free qualified withdrawals and no required distributions for the original owner.

For 2026, the combined limit is $7,500, plus $1,100 at age 50 or older, and Roth eligibility phases out at higher incomes. The right choice depends on comparing today’s tax rate with the expected rate in retirement, and rollover recommendations must meet Regulation Best Interest or the fiduciary standard.

For the exam’s structure and requirements, see the Series 65 dictionary entry, and for the role the exam leads to, read our guide to what an investment advisor representative is.