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Traditional IRA vs Roth IRA

Key facts

  • The key differences between a Roth and Traditional IRA are eligibility requirements and tax implications.
  • Anyone may contribute to a Traditional IRA, whereas Roth IRAs are only eligible to investors in specific income ranges.
  • Roth IRAs take post-tax contributions and allow for tax-free distributions, whereas Traditional IRAs may provide tax incentives on contributions but require taxes to be assessed on distributions.

IRAs, or Individual Retirement Accounts, are retirement savings plan that offer tax benefits to eligible individuals. Depending on whether you choose a Roth IRA or a Traditional IRA, you may receive a tax benefit on either your contributions or withdrawals. Another major difference is that Roth IRA contributions (but not earnings) are eligible for withdrawals at anytime whereas funds in a Traditional IRA may be subject to early withdrawal penalties before age 59 ½ and are subject to mandatory withdrawals after age 70 ½. There are income limits to open a Roth IRA account. While there is no income limit to contribute to a Traditional IRA, tax deductions on contributions depending on the investor’s income.

Comparing a Traditional IRA vs Roth IRA

Plan features Traditional IRA Roth IRA
Income restrictions None to contribute but income limits exist to qualify for tax deductions Single filers: up to $117,000 for max contribution; up to $132,000 for partial contribution
Married filers: up to $184,000 for max contribution; up to $194,000 for partial contribution
Contribution limits $5,500 for those under 50 and $6,500 for those 50 and older
No contributions can be made after 70 ½ years old
$5,500 for those under 50 and $6,500 for those 50 and older
Contribution limit depends on income and scale down incrementally
No age limit on contributions
Withdrawal rules Mandatory withdrawals after 70 ½ years old
Distributions before age 59 ½ subject to 10% penalty
No mandatory withdrawals
Withdrawal of your contribution amounts at any time without penalty.
Distributions of earnings are penalty-free if age 59 ½ or older and account is at least five years old.
Early withdrawal is subject to 10% penalty, except for certain qualified exceptions such as first home purchase or college tuition
Tax implications Contributions may be tax deductible; there are income limits depending on whether you are covered by an employer retirement plan or not covered
Funds are subject to taxes upon withdrawal
Contributions are made with after-tax dollars
Withdrawal of contributions are tax-free at any time and withdrawal of earnings are tax-free after age 59 ½

Which account is right for you?

Individuals in higher income brackets may benefit more from a tax-deferred account like a Traditional IRA. On the other hand, if you meet the income requirements for a Roth IRA and expect to be in a higher tax bracket later in life, paying taxes on your contributions now might be the better choice. A Roth IRA may also be preferential if you prefer the flexibility of withdrawing contributions before retirement for large ticket items such as your first home or your children’s college tuition.

Can you have both types of IRAs?

You may have both types of IRAs, but your annual contribution for all IRA accounts is capped at $5,500 total for investors under 50 and $6,500 for those 50 and older. You may also choose to open and contribute to various IRA accounts over your lifetime. For example, you could contribute to a Roth IRA until you exceed the income cap for eligibility and then start contributing to a Traditional IRA.


Disclosure

Nothing in this article should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. This article is not intended as investment advice, and Wealthfront does not represent in any manner that the circumstances described herein will result in any particular outcome. Financial advisory services are only provided to investors who become Wealthfront clients.

This article is not intended as tax advice, and Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Investors and their personal tax advisors are responsible for how the transactions in an account are reported to the IRS or any other taxing authority.

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