When planning your retirement and evaluating your tax strategy, one key question arises—should you contribute to a Traditional IRA or a Roth IRA? Both types of accounts offer valuable tax benefits, but they operate very differently. The choice between the two can significantly affect your current year’s tax refund and long-term savings strategy. This blog explores the differences between Traditional and Roth IRAs, how each impacts your taxes and refund this year, and how to decide which is best based on your financial goals.
Understanding Traditional and Roth IRAs
An Individual Retirement Account (IRA) allows individuals to save for retirement in a tax-advantaged way. There are two primary types: Traditional IRAs and Roth IRAs. Both allow you to contribute up to a certain annual limit—$7,000 for 2025 (or $8,000 if age 50 or older)—but their tax treatment differs significantly.
Traditional IRA
Contributions to a Traditional IRA may be tax-deductible in the year they are made, lowering your taxable income and potentially increasing your refund. Taxes are then paid upon withdrawal in retirement. This deduction can reduce your adjusted gross income (AGI), allowing you to qualify for additional tax credits and deductions.
Roth IRA
Roth IRA contributions are made with after-tax dollars—no deduction is allowed in the current year. However, withdrawals in retirement are tax-free, including earnings, provided you meet certain conditions. This structure is best suited for individuals expecting higher tax rates in the future.
How a Traditional IRA Can Increase Your Refund
Contributing to a Traditional IRA directly lowers your taxable income for the year, which can lead to a bigger refund. For example, if you’re in the 22% tax bracket and you contribute $6,000, your federal tax bill could be reduced by $1,320.
Additional benefits of reducing AGI include:
- Qualifying for or increasing eligibility for the Saver’s Credit
- Reducing taxable portion of Social Security income
- Reducing income-based phaseouts for deductions or credits
However, deductibility depends on whether you or your spouse are covered by a retirement plan at work. If so, there are income limits for the deduction:
- Single with workplace coverage: Deduction begins to phase out at $77,000 and is eliminated at $87,000 (2025)
- Married filing jointly with coverage: Phaseout starts at $123,000 and ends at $143,000
Why Roth IRA Contributions Won’t Boost Your Refund This Year
Roth IRA contributions do not reduce your current taxable income and therefore do not increase your current year refund. However, the real value lies in long-term tax-free growth. All qualified withdrawals in retirement are tax-free—including interest, dividends, and capital gains. This can be a powerful benefit if you anticipate being in a higher tax bracket later in life.
While it won’t increase your refund this year, a Roth IRA offers:
- No Required Minimum Distributions (RMDs)
- Tax-free qualified withdrawals
- Flexible withdrawal options for contributions at any time (not earnings)
- Estate planning benefits
Saver’s Credit: A Bonus for Low-to-Moderate Income Earners
Both Traditional and Roth IRA contributions may qualify for the Retirement Savings Contributions Credit (Saver’s Credit). This non-refundable credit is worth 10% to 50% of your contribution amount, up to $2,000 ($4,000 if married filing jointly), depending on your income level.
Income limits for 2025:
- Single: $38,250
- Head of Household: $57,375
- Married Filing Jointly: $76,500
If eligible, the Saver’s Credit directly reduces your tax liability and can boost your refund regardless of whether you choose a Traditional or Roth IRA.
Traditional vs. Roth: A Year-by-Year Decision?
Some taxpayers benefit from evaluating their IRA options on a year-by-year basis. In years when income is lower, a Roth IRA may be more advantageous since the upfront tax deduction is less valuable. In high-income years, a Traditional IRA may deliver a stronger tax savings benefit and increase your refund.
Also consider that you can make prior-year contributions up to the tax deadline (typically April 15). This gives you flexibility to calculate your potential refund and decide whether a Traditional contribution would benefit your current return.
Can You Contribute to Both?
You can contribute to both a Traditional and Roth IRA in the same year, but your combined contributions cannot exceed the annual limit. This strategy is useful if you want both current and future tax diversification. However, income limitations may restrict Roth IRA eligibility:
- Single: Phaseout starts at $146,000, ends at $161,000
- Married Filing Jointly: Phaseout starts at $230,000, ends at $240,000
Example Scenarios
Scenario 1: Refund Now
Michael, a single 35-year-old, earns $70,000 and contributes $6,000 to a Traditional IRA. His AGI is reduced to $64,000, dropping him into a lower tax bracket and increasing his refund by about $1,320.
Scenario 2: Tax-Free Later
Jasmine, a self-employed 30-year-old with modest income this year, chooses a Roth IRA. She contributes $5,000 post-tax, getting no refund boost now but ensuring tax-free withdrawals in retirement. She plans to contribute to a Traditional IRA next year when her income increases.
Conclusion: Which IRA Gets You the Refund?
If your goal is to reduce your taxable income and maximize your IRS refund this year, the Traditional IRA is the better option—assuming your income level and workplace coverage allow you to deduct your contribution. However, if you are more focused on long-term tax-free growth and are in a lower tax bracket now, the Roth IRA may be a smarter move.
Always assess your income level, current tax liability, and future tax expectations before choosing. Many taxpayers also benefit from consulting with a tax professional to determine the most strategic IRA option for their financial goals.
In the end, both Traditional and Roth IRAs offer significant tax advantages—you just need to decide whether you prefer the tax break now or in retirement.
