Investing for Retirement: Traditional IRA Versus Roth IRA
Which Retirement Plan is Right for You?
Traditional IRA
- limit on annual contributions- $5,000 ($6,000 for those over 50)
- no maximum income levels for contributions to a traditional IRA
- contributions are tax-deductible
- the earnings within the plan are tax-deferred until withdrawn at which time, both earnings and contributions become taxable
- can only contribute up to age 70
-must begin taking withdrawals by age 70
Roth IRA
- contributions are not tax-deductible
- earnings accumulate tax-free in the plan
- both earnings and contributions can be withdrawn (with certain restrictions) tax-free
- maximum annual contributions $5,000 ($6,000 for those over 50)
- contributions can be withdrawn at any time tax-free
- earnings can be withdrawn with no tax consequences if investor is at least 59.5 years old
- maximum income levels for Roth IRA plan contributions are $120,000 for a single filer and $177,000 for a joint filer
The main benefit of a traditional IRA over a Roth IRA is the tax-deductible eligibility of the contributions. This allows the investor to save taxes in the year of the contribution which means he or she is able to make a larger contribution. However, this is only a deferral, not an erasure, of taxes as the contributions are taxes upon withdrawal. Paying taxes later is almost always better than paying taxes now, with the time value of money. If the investor expects to be in a lower tax bracket at retirement than now, it results in a partial permanent erasure of taxes. For example, if the investor saved $1,200 in income taxes this year by making the maximum contribution but only had to pay $900 in taxes when that contribution was withdrawn 20 years from now due to being in a lower tax bracket, he has permanently saved $300 in income taxes.
For those who believe that they will be in the same or higher tax bracket when they retire and who do not want to have to begin withdrawals at 70, a Roth IRA may make more sense.
The rules for both traditional and Roth IRAs change from year to year so it is important to check with your investment professional before settling on which one is right for you.
Published by Angie Mohr CA CMA - Featured Contributor in Business & Finance
Angie Mohr is a Chartered Accountant and Certified Management Accountant who has worked with thousands of business clients from home-based entrepreneurs to rock bands to celebrity chefs. She is also the auth... View profile
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2 Comments
Post a CommentExcellent info!
My husband and I are about to look at these...thanks for explaining the difference.