Traditional IRA vs. Roth IRA

Print

Traditional or Roth?

Traditional or Roth?

Opening an IRA is a great way to save for your retirement. Whether to open a Traditional or a Roth IRA is an important decision with different tax consequences. In short, contributions to a Traditional IRA may be tax deductible and can grow tax deferred. Roth IRA contributions are not tax deductible, but they have the potential to grow tax free.

What is a Traditional IRA?

  • Available to anyone with earned income, or whose spouse has earned income (if you file your taxes Married Filing Jointly)
  • Contributions may be tax deductible, depending on your income level and your participation in an employer retirement program
  • Taxes are paid on contributions and earnings when withdrawn
  • Withdrawals taken before age 59 ½ are subject to a 10% penalty (certain exceptions apply)
  • Mandatory withdrawals are required beginning at age 70 ½. Contributions must stop at that time.

What is a Roth IRA?

  • You or your spouse (Married Filing Jointly) must have earned income in order to contribute • Contributions are not tax deductible
  • Income limits apply: available to single filers with an annual modified adjusted gross income (MAGI) of $131,999 or less, or married couples filing jointly with an annual combined MAGI of $193,999 or less
  • No mandatory distribution age
  • All principal and earnings are withdrawn tax free, if certain regulations are followed
  • Contributions can be withdrawn at any time without penalty (subject to some minimal conditions)

What is the maximum contribution limit for 2016?

As stated above, you must have earned income in order to contribute to either a Traditional or a Roth IRA. For 2016, the maximum contribution limit is the lesser of the amount of your taxable income or $5,500. If you are age 50 or over, the maximum contribution limit is the lesser of the amount of your taxable income or $6,500.

Which type of IRA is right for me?

To determine which type of IRA works best for your tax situation, it may benefit you to speak to a competent tax professional.

Where can I open an IRA?

Both Traditional and Roth IRAs can be opened at a bank, brokerage or mutual fund company. *For additional information, please see IRS Publication 590 here, Individual Retirement Arrangements (IRAs)

 

  All investments are subject to risk, including the possible loss of the money you invest. Past performance does not guarantee future results. There is no guarantee that any particular asset allocation, or mix of funds, or any particular mutual fund, will meet your investment objectives or provide you with a given level of income.