The main difference between Traditional IRAs and Roth IRAs is when you pay tax on the contributions you make to the account. With a traditional IRA, you pay the money upon withdrawal. With a Roth IRA, it’s the opposite – you pay taxes on contributions, but there are no tax implications upon withdrawal. One quick tip – if you’re in the lower tax bracket now, it makes sense to choose the Roth IRA (paying tax now, and not when you withdraw at the end).
There are other differences too – compare the two in the table below. With something as important as retirement, it’s a good idea to do your research. Start with reading more on the IRS’ website, contact the IRS with any questions, or consult a tax professional.
|Traditional IRA||Roth IRA|
|The basics||Contributions and growth are tax-free. Tax is paid upon withdrawal in retirement.||Withdrawals and growth are tax-free. Roth IRA contributions are not tax-deductible.|
|Who can invest in it?||Anyone under 70 ½ with taxable income.||Anyone with taxable income.|
|Maximum contributions (i.e. deposits)||For 2014:
Income limits do not apply for Traditional IRAs.
However, if you are participating in an employer plan and make more than $70,000 (single) or $116,000 (married filing jointly), you can’t deduct your IRA contribution.
Income limit of $129,000 for single accounts or income limit of $191,000 for joint accounts.
|Tax advantages||No tax until you take distributions (i.e. make withdrawals).||Tax-free when you take distributions.|
|Tax deductions||Will differ depending on:
||Contributions are not deductible.|
|Distributions (i.e. withdrawals)||Withdrawals are taxable and in some cases there is a penalty for distributions made before age 59½.||
|Required minimum withdrawal||Mandatory at age 70½.||Not required.|
|Annual deadline for contributions||The deadline for filing your annual tax return.|
New to Betterment? As the most trusted online financial advisor, Betterment offers a fully diversified investment portfolio of 12 global asset classes, optimized to provide you the best possible returns for retirement planning with both Traditional and Roth IRAs. Betterment costs 0.15% of assets under management annually for a portfolio of $100,000 or more. Learn more here.
Determination of most trusted online financial advisor reflects Betterment LLC’s distinction of having the most customers in the industry, made in reliance on customer counts, self-reported pursuant to SEC rules, across all online-only registered investment advisors.
This article was published on January 18, 2014
Was this article helpful to you?
Our newsletter is full of tips to help you lead a smarter financial life.