Comparing IRAs: Traditional vs. Roth IRA

Individual retirement accounts, or IRAs, are some of the best savings vehicles available. Due to their significant tax benefits, you gain the advantage of compounding, which helps you potentially earn more on top of the money you put in. IRAs are also independent of any workplace retirement accounts, like 401(k)s, so you never have to worry about transferring the money if you change jobs.

In 2016, they also share the same annual contribution amount: up to $5,500 per person, or $6,500 for individuals who are 50 and older.

Still, an IRA comparison reveals there are major differences between a traditional IRA and a Roth IRA. Let’s take a look at these differences, so you can decide which may be the best option for you.

Traditional IRA vs. Roth IRA

When you own a traditional IRA, your money is not taxed before you contribute. The earnings are tax-deferred, which means you pay no taxes until assets are taken out of the account. Once you turn 70-1/2 years old, you can no longer make contributions to the account and you must begin taking required minimum distributions (RMDs) each year. There are penalties for failing to take RMDs.

Traditional IRAs come with another potential tax advantage. As long as you do not have access to a retirement plan at work, you can claim a full income-tax deduction for your contributions each year. In 2016, single filers who do not have access to a workplace retirement plan and earn $61,000 or less can take the full deduction, or a partial deduction for up to $71,000 of earned income. If you have a plan, then the limits for a partial deduction are $98,000 to $118,000; or $184,000 to $194,000 if your spouse has access to a plan but you do not, and you file jointly.

Now, with a Roth IRA, your money is taxed before you contribute. The earnings grow tax-free forever after that. Withdrawals are not taxed, either, as long as the account is five years old and you withdraw once you turn 59-1/2. If you withdraw before then, you could pay a 10% penalty on the earnings. You do not have to take RMDs; in fact, you can leave the money in the account forever, as long as your earn money. (Here are some mistakes to avoid if you decide to leave your IRA to your heirs.)

Something that is unique to the Roth IRA is the income threshold. If your modified adjusted gross income exceeds a maximum of $132,000 in 2016, then you earn too much to contribute to a Roth IRA. The limit for married couples filing jointly is $194,000. If your income surpasses these amounts, then you may want to consider a traditional IRA or, once you retire, rolling over after-tax 401(k) contributions to a Roth IRA.

If you have any questions about which IRA is the best fit for your financial plan, then please feel free to reach out to our financial advisors and wealth managers at (847) 330-9911.


– The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

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