The Difference Between Traditional and Roth IRAs

Individual retirement accounts or IRAs are available to most Americans with earned income. In many cases you may supplement retirement savings with an IRA even if you participate in the company sponsored retirement program. IRAs come in two varieties, the Traditional and the Roth.

Common Characteristics of Both Accounts

Deposits can occur until April 15 the following year.

Maximum contributions cannot exceed $5,500 for everyone under 50 and $6,500 for those over 50. You can deposit up to 100% of earned income not to exceed the maximums.

Withdrawals prior to 59 ½ could result in a 10% penalty in addition to any taxes due. There are a few exceptions to this rule.

Traditional IRA

A Traditional IRA gives you an immediate tax deduction and tax deferred growth until withdrawal when it is taxed as ordinary income. You may contribute until age 70 ½, when mandatory withdrawals begin. Anyone without a company plan can contribute regardless of income. Availability of a company plan requires an income test to determine the tax deductibility of contributions.

Roth IRA

A Roth IRA does not grant an initial tax deduction. Instead funds grow tax free, with no taxes due when you withdraw funds. There are no age restrictions or mandatory withdrawals. To qualify for a withdrawal, you must own the account for a minimum of 5 years and you cannot withdraw earnings until reaching the 59 ½ age threshold. Due to the taxation of deposited funds, you can remove contributions at any time without penalty. Income limits for the Roth account begin at $118,000 for single filers and do not allow contributions past $133,000. For joint filers, the phase out begins at $186,000 and you become ineligible to contribute when income levels exceed $196,000.

Using personal IRAs to increase savings gives you an opportunity to grow retirement balances regardless of where you work.