11 Jul What is the Difference Between a Traditional and a Roth IRA?
Limitations for contributions:
Anyone under the age of 70 ½ and who has earned income is able to contribute to a Traditional IRA. However, the tax deductibility of those contributions depends upon an individual’s income level and if the individual, or their spouse, has access to a retirement plan at work. Click here for more details on the IRS guidelines
Roth IRA’s do not have age restrictions for contributions but they do have income-eligibility limits. In 2018, single tax filers must have modified adjusted gross incomes of less than $135,000 to contribute to a Roth IRA. Married couples filing jointly must have modified AGIs of less than $199,000. Contributions for both single and married filers begin to phase out starting at AGIs of $120,000 and $189,000, respectively.
An individual is able to contribute 100% of earned income up to the maximum contribution limit of $5,500 (2018 figure), if over the age of 50, $6,500. There is a “catchup” provision for IRA’s that allow individuals over the age of 50 to contribute an additional $1,000 per year.
Traditional IRA contributions are deductible the year you make the contribution (if eligible) and withdrawals after the age of 59 ½ are taxed at your ordinary income tax rate.
Roth IRA’s provide no tax break the year of the contribution but qualified withdrawals are tax-free.
Traditional IRAs mandate you begin taking “Required Minimum Distributions” (RMDs) starting at age 70 ½ whereas Roth IRAs do not require any mandatory withdrawals during the original owner’s lifetime. However, the individual who inherits the Roth IRA will be required to take distributions.
Both Traditional and Roth IRAs allow owners to begin taking penalty-free, “qualified” distributions at age 59 ½.
Roth IRA rules require at least five years to pass after the first contribution before you can withdraw the earnings tax free.
Extra Benefits & Contributions:
Roth Contributions (not earnings) can be withdrawn penalty- and tax-free at any time, even before the age of 59 ½ .
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Last updated July 10, 2018
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