The main difference between traditional IRAs and Roth IRAs is this: The moment when you pay taxes on the contributions and earnings in the account.
With a traditional IRA, you pay the taxes upon withdrawal, but might save taxes on contribution.
With a Roth IRA, it’s the opposite—you pay taxes on contributions, but there are no taxes upon withdrawal, even on the earnings.
One quick tip—if you’re in a lower tax bracket now than you expect to be in retirement, it may make sense to choose the Roth IRA (pay tax now, and not when you withdraw your investment at the end).
There are other differences, too. With something as important as retirement, it’s a good idea to do your research. Start with reading more on the IRS’ website for help 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 2015 and 2016:
Income limits do not apply for traditional IRAs.
However, if you are participating in an employer plan and make more than $71,000 (single) or $118,000 (married filing jointly), you can’t deduct your IRA contribution.
|For 2015 and 2016:
Income limit of $131,000 for single accounts or income limit of $193,000 for joint accounts.
In 2016, it’s $132,000 for single accounts or income limit of $194,000 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.|
Which IRA should you use?
Use the calculator to get customized IRA advice.