What’s the difference between a Traditional IRA and a Roth IRA?

What’s the difference between a Traditional IRA and a Roth IRA?

The key difference between a Traditional IRA and a Roth IRA is whether it makes more financial sense to enjoy tax free benefits in the future or take advantage of tax benefits now. Traditional IRA  contributions go in tax-free and withdrawals are taxed in retirement.  Roth IRAs, however,  don’t provide immediate tax break for funding an account, but your withdrawals are tax-free when you with access your money.  When determining which use, decide if you want to be taxed now, at today’s rate, or later at a rate that is currently unknown.
A Roth IRA is an Individual Retirement Account that allows you to contribute after-tax dollars. With a  Roth IRA,  there are no current-year tax benefits but you can withdraw the money tax and penalty-free after age 59½ and once the account has been open for five years.

A Traditional IRA is an Individual Retirement Account which you can contribute pre-tax. With a Traditional IRA, your money can grow tax-deferred, but you’ll pay ordinary income tax on your withdrawals, and you must start taking distributions after age 70½.

Roth IRA: Best option for an individual who expects to be in a higher tax bracket when withdrawals begin.

Traditional IRA: Best option for an individual who expects to be in the same or lower tax bracket when withdrawals begin.

Taxes: Roth: Contributions grow tax-free. Tax-deductibility: Gives you NO current-year tax benefits. Traditional: Contributions grow tax-deferred. Tax-deductibility: Gives you immediate tax benefits.

 

Contributions: Roth: Funded by money that has already been taxed. Example, this option is funded using your take home pay… after the government has received their portion.

Traditional: Funded by money that has NOT already been taxed. Example, this option is funded using money you’ve earned BEFORE the government takes their portion.

Maximum contribution for both is $5,500 ($6,500 if you’re age 50 or older) per year.

Roth: Maximum Age restrictions – NONE

Traditional: Maximum Age restrictions – 70½.

Withdrawals: Roth: Penalty- and tax-free after 5 years and age 59½.  Mandatory distributions: NONE. Traditional: Penalty-free but taxed as current income after age 59½. Mandatory distributions: After age 70½.

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