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Ever Wonder About the Difference Between Roth and Traditional IRAs?

Posted Date: Thursday, February 20, 2014

The type of individual retirement account (IRA) you choose can have a huge impact on your family’s retirement savings. That’s why it’s worth knowing the options available to you and how they will affect your savings over time.

The main difference between a traditional IRA and Roth IRA is that you pay taxes on the back end with a traditional IRA, and you pay taxes on the front end with a Roth IRA. In both cases, the money grows tax free when it’s in the account. Additionally, just about anyone can contribute to a traditional IRA whereas a Roth IRA has some income limits. Roth IRAs are more flexible, though, so if you need to withdraw money early, you can do so.

Let’s delve a little deeper into some other differences between these two accounts and which one is best for you.

Income Limits

Anyone who is younger than 70 ½ and earns an income can contribute to a traditional IRA. As mentioned above, Roth IRAs have eligibility restrictions based on your income. These restrictions deal with the adjusted gross incomes of individuals and married couples. For more information on the full income limits, visit here.

Tax Incentives

The advantage to IRAs is that they have generous tax breaks. There are differences for when you can claim them, though. Traditional IRA contributions are tax deductible on tax and federal returns, while withdrawals are taxed as ordinary income. Roth IRA contributions have no tax breaks, but earnings and withdrawals are tax free. Basically, one account gives tax breaks when putting the money in (traditional), and the other gives breaks when taking the money out (Roth).

Withdrawals

Traditional IRAs require that you take money out starting at age 70 ½. Roth IRAs do not have any requirements, which is helpful if you don’t need the money and want to keep growing your account. And, since Roth IRAs can continue growing tax-free throughout your lifetime, it’s an excellent way to pass money down to members of your family. Beneficiaries also do not have to pay income tax on the withdrawals, so the distributions can be stretched out over time.

Still have questions and wondering which IRA plan is best for you? Not to worry. Just contact us and we’ll be happy to help and answer any questions you may have. This way you can make the best decision as to which IRA is right for you.

Source: RothIRA.com

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