Individual Retirement Accounts (IRAs) come in two main types: traditional and Roth. Both share the same annual contribution limits, but they differ in tax treatment. Traditional IRA contributions may be tax-deductible, reducing your current taxable income, but withdrawals in retirement are taxed as ordinary income. Roth IRA contributions are made with after-tax dollars, but qualified withdrawals are completely tax-free. The combined limit across all your IRAs is $7,000 for 2024, with an additional $1,000 catch-up contribution for those aged 50 and older.

The deductibility of traditional IRA contributions depends on whether you (or your spouse) are covered by a workplace retirement plan and your income level. If you are not covered by any workplace plan, your traditional IRA contributions are fully deductible regardless of income. If you are covered, the deduction phases out at certain income thresholds that vary by filing status. For Roth IRAs, eligibility to contribute directly phases out at higher income levels, although backdoor Roth conversions may be available as an alternative strategy.

When deciding between traditional and Roth contributions, consider your current versus expected future tax rate. If you expect to be in a lower tax bracket in retirement, a traditional IRA deduction saves you more now. If you expect higher taxes in retirement, a Roth IRA's tax-free withdrawals become more valuable. Many financial advisors recommend maintaining both types of accounts for tax Diversification, giving you flexibility to manage taxable income in retirement.