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:

  • $5,500 for those under 50.
  • $6,500 if age 50 or older

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.

For 2014:

  • $5,500 for those under 50.
  • $6,500 if age 50 or older

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:

  • Your earnings
  • Whether you participate in an employer’s 401(k)/403(b) retirement plan
  • Your filing status
  • If you receive Social Security benefits
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.
  • Distribution of an original contribution is tax and penalty free.
  • Any earnings and conversion dollars (from other retirement plans) are tax free after the IRS’ 5 year aging requirement has been met AND you are 59½ or older.
  • Potential 10% penalty for early withdrawal.
Required minimum withdrawal Mandatory at age 70½. Not required.
Annual deadline for contributions The deadline for filing your annual tax return.

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This article was published on January 18, 2014

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