What is the difference between a Traditional IRA and a Roth IRA?
IRAs are a great way for you to save for the future. Your IRA can consist of a range of investments from savings accounts, stocks, bonds, and certificates of deposit or share certificates. You can contribute up to a certain limit each year into your IRA and if you're over 50, you are allowed an additional "catch up" contribution.The tax advantages of a Traditional or Roth IRA depend on your annual income and whether you are covered by your company's retirement plan.
Below we have provided a table to help you understand some of the differences between a Traditional and Roth IRA.
| Traditional IRA | Roth IRA | |
|---|---|---|
| Primary benefits | The earnings are tax-deferred until withdrawn and for many taxpayers, the contributions made are tax deductible. | All qualified distributions (defined as withdrawals allowed from the plan without penalty) are tax-free. |
| Income limits for contributions | Yes, if actively participating in an employer-sponsored retirement plan. | The maximum income limits for Roth IRA contributions is $167,000 in 2010 for married couples filing jointly, and $105,000 for singles. |
| Contribution limits | $5,000 per calendar year | Same |
| Catch-up contributions | Additional $1,000 if 50 years of age by end of the tax year | Same |
| Tax advantages |
All IRAs are tax deferred. You do not owe taxes on any earnings until you make a withdrawal. If you qualify, you may be able to deduct your contributions to a traditional IRA on your federal income tax return, depending on tax-filing and active-participant statuses, as well as income amount. Earnings grow on a tax-deferred basis. Earnings are added to taxable income for the year distributed. |
Contributions to a Roth IRA are not tax deductible. Earnings grow tax deferred. A Qualified Distribution from a Roth IRA is tax-free. Earnings are tax-free if you have had an account for five years and one of the following applies:
|
| Age for required distributions | Mandatory distributions must begin by April 1 following the year you reach age 70½. Beneficiaries are also subject to this rule. | No. Distributions are not required during your lifetime. Distributions may be taken at any time. |
|
Early |
There is a 10% penalty on withdrawals prior to age 59½ except for withdrawals due to:
The portion of a withdrawal that is the return of nondeductible contributions is not subject to penalty. |
There is a 10% penalty applied to the earnings portions prior to age 59 1/2 except for withdrawals due to:
Withdrawals of after-tax contributions are not subject to penalty. |
| Conversion options |
A traditional IRA can be converted to a Roth IRA if your income is within IRS limits The amount converted is included in taxable income for the year. |
A Roth IRA cannot be converted into any other kind of IRA. |
If you have any further questions about this, call us at 206.398.5500 or send us a message.