Retirement Accounts: Roth IRA vs. Traditional IRA

If you are planning to open a retirement account, one of the first things you need to figure out is if you want to open a traditional IRA or a Roth IRA. Both are great retirement offerings, but there are a few differences to research prior to opening one. There is also some overlap in that both defer taxes while the money is in the retirement account, and both have contribution limits to them. 2018 is $5,500.

Traditional IRAs contributions are tax deductible on both state and federal tax returns for the year you make the contributions. When you withdrawal from your traditional IRA, the amount will be treated as ordinary income and taxed.

Roth IRAs provide no tax break for your contributions, but earnings and withdrawals are tax-free. So while you pay taxes on your contributions today, you will be receiving tax-free withdrawals for the future.

Another big difference between the 2 IRAs is when the savings must be withdrawn. Traditional IRAs require you to start taking a required minimum distribution at age 70 ½. It doesn’t matter if you need the money or not. Roth IRAs do not require any withdrawals during the owner’s lifetime. You can let your Roth IRA grow tax-free and can be very good wealth-transfer vehicles. 

Another difference is Roth IRAs have income-eligibility restrictions. In 2018, single tax filers must have income less than $135,000 to contribute to a Roth IRA. Married filing joint must have income less than $199,000. If you make more than those income limits, you are unable to contribute to a Roth IRA, but can contribute to a Traditional IRA.

Overall, each account has its own advantages and disadvantages, and really depends on your personal situation. The important thing to know is both are great retirement accounts and offer a great tax-deferred way to save for your retirement.