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Traditional IRA vs Roth IRA: Which is Right for you?

Traditional IRA vs Roth IRA: Which is Right for you?

The term IRA is an acronym for “Individual Retirement Account”. It is a specific type of investment account designated for building retirement savings. There are many different types of IRAs, but the two most common are traditional IRAs and Roth IRAs. While both are individual investments, each has their own features to consider when deciding to open an individual retirement account.

Traditional IRas

A traditional IRA allows contributions that are tax deductible (within the IRS limits), and grows tax deferred until you withdraw the funds.

Who can contribute?

  • Anyone under the age of 70 ½ who has income compensation (or who is filing jointly with a spouse who earns compensation)

  • If you have received a distribution from a qualified retirement plan and decide to rollover the proceeds of that plan into an IRA

How much can you contribute?

Year Regular Contribution Over Age 50
2013 – 2018 $5,500 $6,500
2019 – 2020 $6,000 $7,000

 

The contributions cannot exceed your compensation, and this reduces the amount that can be made to Roth IRAs.

What are the tax advantages?

Your earnings grow tax deferred until withdrawn, and your contributions may be tax deductible. You should consult a tax professional or IRA Publication 590 for advice.

When can you withdraw without penalty?

You can conduct withdrawals after the age of 59 ½ without the 10% IRS early withdrawal penalty. Other exceptions apply such as:

  • Qualified higher education expenses
  • First-time home purchase
  • Disability

For a complete list of exceptions to the penalty, or to determine if your withdrawal qualifies, consult a tax professional.

Not intended as tax advice. Please consult a tax professional.

Roth IRAs

Roth IRAs are not tax-deductible, but your investment will grow free of taxes and you will be able to withdraw the money tax-free during retirement.

Who can contribute?

  • Anyone under the age of 70 ½ who has income compensation (or who is filing jointly with a spouse who earns compensation)
  • If you have received a distribution from a qualified retirement plan and decide to rollover the proceeds of that plan into an IRA

 

How much can you contribute?

Year Regular Contribution Over Age 50
2013 – 2018 $5,500 $6,500
2019 – 2020 $6,000 $7,000


The contributions cannot exceed your compensation, and this reduces the amount that can be made to traditional IRAs.

Can you deduct your contributions?

Roth IRA contributions must be included in your taxable income, and therefore are not tax deductible. You may qualify for a savers tax credit, but you should consult a tax professional to determine whether your contribution qualifies.

What are the tax advantages?

You earnings will grow tax-deferred until withdrawn. Earnings may be withdrawn tax-free if the account is open for five tax years and withdrawn for a qualified reason: age 59 1/2, death, disability, or a first-time home purchase.* You also are not required to start withdrawals at 70 ½.

When can you withdrawal without penalty?

  • Regular contributions can be withdrawn tax- and penalty-free at any time.
  • After the account has been open for five tax years, earnings can be withdrawn tax- and penalty-free for any of these reasons:
    • Age 59 ½
    • Disability
    • Death
    • First-time home purchase*

For a complete list of exceptions to the penalty, and to determine if your withdrawal qualifies, consult a tax professional.

*Lifetime limit for exemption on first-time home purchase is $10,000.
No intended as tax advice. Please consult a tax professional.
 
 
 
 

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