So many of our clients have questions regarding which is better… we want to educate you so that we can assist you with making the best decision for you.
First of all… what is an IRA (Individual Retirement Account)? An IRA is a plan that allows anyone with earned income (and certain spouses of workers) to set aside money for retirement purposes on a tax-deferred basis. Contributions to an IRA are generally deductible from federal income tax. Once the funds are withdrawn the amount is considered taxable income.
A Roth IRA is a qualified plan that was established in 1998. Like an IRA, these accounts are designed for retirement savings. Contributions to a Roth IRA do not qualify for a deduction, however the owner generally will not be taxed on any distributions in the future.
It’s important to note that Traditional IRAs and Roth IRAs are subject to certain qualifications and restrictions (see table below).
| Roth IRA | Traditional IRA | |
|---|---|---|
| Maximum contribution (2015): | ||
| age 49 and under | $5,500** | $5,500** |
| age 50 and over | $6,500** | $6,500** |
| Contributions allowed after age 70½? | yes | no |
| Maximum deduction (2015): | ||
| age 49 and under | zero | $5,500* |
| age 50 and over | zero | $6,500* |
| Active participant in employer plan? | irrelevant | important |
| Joint return phaseout range (2015) | $183,000-$193,000 | $116,000-$131,000* |
| Single taxpayer phaseout range (2015) | $116,000-$131,000 | $61,000-$71,000* |
| Tax-deferred earnings? | yes | yes |
| Income tax-free withdrawals after 5 years? | yes, potentially | no |
| Withdrawals after age 59½ without 10% penalty? | yes, potentially | yes, potentially |
| Required minimum distributions after age 70½? | no | yes |
*For tax-deductible contributions.
**Lesser of this dollar limit or 100% of earned income.