Differences Between Traditional Iras and Roth Iras

Money/Finances - Retirement

By: JenniferAWalker     02-Feb-2011

Introduction:

Individual retirement accounts, or IRAs, are an important part of your retirement savings plan. You may be able to open a traditional IRA or a Roth IRA, or both, depending on your income and whether you qualify for an employer-sponsored retirement savings account.

Eligibility

You can contribute to either a Roth IRA or a traditional IRA if you have taxable compensation during the year. Your adjusted gross income must be below the IRS limit to contribute to a Roth IRA. You cannot contribute to a traditional IRA after the age of 70 1/2, but you can contribute to a Roth at any age.

Limitations on Contributions

Traditional IRA contributions are limited to the smaller of your taxable compensation or $5,000. A $1,000 catch-up contribution is available if you are at least 50 years old, for a maximum contribution of $6,000. The limits are the same for Roth IRA contributions, with a phase-out at the upper income levels.

Tax on Contributions

If you make a qualified contribution to a traditional IRA, as explained above, you can deduct the contribution amount from your taxable income. Roth IRA contributions do not qualify for a tax deduction.

Withdrawals

You can withdraw contributions you made to your Roth account at any time, without paying tax or penalty. Distributions from traditional IRAs, and distributions of earnings in Roth IRAs, are subject to a 10 percent penalty if taken before you are 59 1/2 years old. You must take a distribution from your traditional IRA annually once you turn 70 1/2. There is no required minimum distribution from a Roth IRA.

Tax on Distributions

Distributions from traditional IRAs are taxable when they are taken. Distributions of Roth IRA contributions are not taxable; distributions of Roth IRA earnings are not taxable if they are taken after you have had the Roth IRA for at least five years.




Final Thoughts

Traditional and Roth IRAs serve different purposes, and both may be appropriate for your retirement account. The rules applying to IRA contributions and withdrawals can get complex in some situations, so talk with a financial advisor or tax planner for specific advice.


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