Traditional vs. Roth IRA

 In Investing


There are many different options out there for investment vehicles when it comes to your retirement, many of which we will touch on later, but here we’re going to keep things simple. The two most common IRA’s (while there are others) are the Traditional and Roth IRA’s. We’re going to break down the main differences between the two to help you understand what you may be involved in or help decide which one may be the best choice for you.

Traditional IRA:

  •  In a Traditional IRA, contributions to the plan are made before tax, earnings are not taxed, and withdrawals are generally taxed at ordinary income rates.
  • $5,500 per individual (or $11,000 per couple) can be contributed to an IRA each year, with April 15 as the deadline to make previous year contributions. An additional $1,000 can be contributed under the catch-up provision if the person is over the age of 50.
  • When the age of 70.5 is reached, contributions can no longer be made and distributions from the plan must begin on the following April 1. Distributions can begin as early as age 59.5
  • Distributions before age 59.5 may result in a 10% penalty depending on their purpose. To not be charged with a penalty for an early withdrawal, the distribution must be because of: death, disability, first-time primary residence purchase, higher education for immediate family members, or certain medical expenses that are greater than 10% of adjustable gross income.
  • These tend to appeal to those who expect to be in a lower tax bracket at retirement, want a current tax deduction, and aren’t eligible for a Roth IRA.

Roth IRA:

  • Contributions are made after tax, earnings grow tax free and can be withdrawn tax-free if the account is at least five years old AND:
    • The account holder is at least 59.5 OR
    • The withdrawal is for a first-time primary residence purchase, or
    • The account holder has died or become disabled.
  • The contribution limits are the same as Traditional ($5,500).
  • Unlike Traditional, contributions can be made after age 70.5 if the person still has earned income, and distributions are also not required at that time.
  • You must fall below certain earnings limits to be eligible. As of 2016, anyone with adjustable gross income (AGI) of $117,000 or less can contribute the full amount to a Roth IRA, but contribution limits are phased out if AGI is between $117,000 and $133,000. For couples, those numbers are $184,000 and $194,000.
  • Contributions can be made to both a Traditional and Roth IRA provided the combined contribution doesn’t exceed the $5,500 limit.
  • Generally appeals to those who prefer tax-free distributions, expect higher or unchanged tax-bracket at retirement, and want tax-free retirement income.
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