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.|
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This article was published on January 18, 2014