Roth IRA vs Traditional IRA: What’s the Difference?

Roth IRA vs Traditional IRA

An IRA or individual retirement account is a good way for you to save for the future. As the name implies, you’re saving for retirement.

When you go to open up and IRA, you may have the choice between a Roth IRA and a Traditional IRA. While both are similar in nature, each comes with its own benefits and requirements.

It’s time for you to start thinking about your future and your life after retirement.

Are you wondering whether you should open a Traditional IRA or a Roth IRA? Below we’ll discuss the Roth IRA vs Traditional IRA to help you decide for the future.

Tax Implications: The Biggest Differences

The biggest difference between Traditional and Roth IRAs is the tax implications. Both types of retirement accounts provide you with generous benefits. The difference is when you get to claim those benefits.

Traditional IRA Tax Benefits

Contributions to a Traditional IRA are tax-deductible, meaning you can claim them on federal and state tax returns.

This reduces your taxable income for that fiscal year. Depending on your income, you could qualify for tax incentives you wouldn’t have otherwise.

The contributions you make to a Traditional IRA will grow tax-deferred until the account matures at retirement. Upon retirement, you’ll pay ordinary income tax on any and all withdrawals.

Roth IRA Tax Benefits

With a Roth IRA, your money is taxed before you make contributions to the account. Like a Traditional IRA, the contributions will grow tax-free.

Because the contributions are taxed according to ordinary tax rates, you won’t pay income taxes upon withdrawal. If you believe income tax rates will be higher in the future, this could tax you on taxes in the future.

Roth IRA vs Traditional IRA

When you’re trying to choose between the two types of IRAs, there are some other benefits and requirements you’ll need to consider.

Limits on Contributions

One of the first things you’ll need to consider is the income requirements. Traditional IRAs have no income limits but have age restrictions. Roth IRAs have no age restrictions but have income limits.

If you’re under 70 1/2 years of age, you can make contributions to a Traditional IRA and take deductions. Keep in mind the deductions you can take may depend on income and whether you or a spouse has an employee retirement account.

If your modified adjusted gross income (MAGI) less than $137,000 dollars a year, you can make contributions without age restrictions. This figure jumps to $203,000 for married couples who file jointly.

For both, there are restrictions on the amount you can contribute each year. For both types of IRAs the following restrictions apply:

  • Anyone under 50 years of age can contribute up to $6,000 each year
  • Those over 50 years of age can contribute up to $7,000 each year

These 2019 figures are up from 2018 and may change in the future. Limits may vary depending on your income.

Withdrawal Rules and Limitations

For each type of IRA, you’ll face certain restrictions and penalties on withdrawals. The two IRAs vary dramatically in this regard

Once you reach age 72 1/2, you must start taking required minimum distributions (RMD) from your Traditional IRA. These distributions are mandatory whether you need the money or not. Any withdrawals you make at this point are taxable.

You are never required to withdraw any money from your Roth IRA. If you have enough from another source of income, you can allow your money to grow tax-free for the rest of your life.

This makes Roth IRAs a good way to transfer wealth to your heirs. If you leave a Roth IRA to your heirs, they can take distributions over the course of several years and pay no income tax. They may need to pay estate taxes.

If you decide to make withdrawals from either IRA, you may face certain penalties, However, these penalties vary per type of IRA.

These penalties are a little more lenient for Roth IRAs compared to Traditional IRAs. If you take withdrawals from a Roth IRA before age 59 1/2, you’ll pay a 10% penalty fee only on earnings.

You won’t face a penalty on the principal contributions as long as your first contribution was at least five years prior to withdrawal.

Which Is Right for You?

It’s time for you to start thinking about retirement, and you’re looking at you different retirement account options. An IRA can be a great addition to any other employer-sponsored retirement accounts you have.

Choosing between a Traditional and Roth IRA can be a bit confusing at first. Whichever one you choose may largely depend on your personal preference. In some cases, you may have to choose a Traditional IRA if your income is high.

The tax benefits of each are pretty generous, but some believe the Roth IRA offers greater benefit. You’ll need to look at your own financial situation and decide which one will offer the biggest benefits to you.

With a Traditional IRA, you’ll eventually need to face the tax burden on your withdrawals. If taxes rise, you could be paying more than you would have on your original contributions.

Once you pay income tax on your Roth IRA contributions, you’ll never pay taxes on that money again.

Prepare for the Future

Planning for the future is one of the most difficult tasks we will ever have to complete. There are a lot of questions to consider when it comes to planning for retirement.

One of those is that of a Roth IRA vs Traditional IRA. Both offer their own benefits and drawbacks. Consider the information above to help you make a decision.

It’s okay to need some help along the way. You don’t have to do it alone. Check out what we at Navigation Wealth Management have to offer by clicking here.

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Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.