What Are the Differences Between a Traditional IRA and a Roth IRA?

When it comes to the traditional IRA and a Roth IRA, you may be slightly confused as to which one is better and which one is going to be the best for your family in the long run. It is worth understanding the differences between the two when making a decision.

Traditional IRA’s

When you contribute to the traditional IRA your taxable income will be lowered in the next tax year. This lowers the adjusted gross income as well. This helps a person qualify for other incentives on your taxes that would not normally be available to you. This is going to allow you to qualify for the child tax credit or even the student loan deduction.

If you are under the age of 59 ½ you are able to withdraw 10,000 or less from the account without a penalty fee. This can be used to pay for your first home or education expenses. You may also be exempt from a penalty if you have a disability, medical expenses. Keep in mind that you will have to pay taxes on this money you have withdrawn.

With a traditional IRA, you are able to contribute 6,000. However, if you are 50 or older you can contribute 7000. You are also able to contribute if you have any type of earned income. However, keep in mind that tax deductibility is based on your income and participation in your employer plan. When using this IRA you are going to have your ordinary taxes owed on a withdrawal.

You are not going to be penalized on withdrawal if you are over 59 ½. However, distributions are going to begin at the age of 70 ½. A beneficiary is going to pay taxes on inherited IRA and taxes.  A contribution will lower a person’s AGI which could qualify them for tax incentives.

Roth IRA

You can face a penalty with Roth’s contributions. However, keep in mind this is not your earnings. This withdrawal can be done and is tax-free before the age of 59 ½, if you’re under that age you can withdraw 10,000 or less without a penalty. This is going to allow you to buy a house for the first time or you have at least 5 tax years since the initial contribution. These funds are able to be invested. You can invest in index funds, stocks, or even lifecycle funds.

You are able to contribute to 6000 if you are under the age of 50. If you are 50 or older you are able to contribute 7000. You are eligible for Roth IRA’s if you are a single tax filer who has modified AGI’s that are less than 13700. A married couple that files together can have less than 203000 with modified AGI’s. There are no tax breaks for the contributions and you are able to have tax-free withdrawals and retirement. These withdrawals are going to be able to be done at any time and are penalty-free and tax-free.

Tax Incentives

With both traditional and Roth IRA’s you are going to have a generous tax break. However, it is going to be the timing that allows you to claim them. A traditional IRA is going to be tax-deductible with your state and federal returns for the year that the contribution is made. If you are withdrawing in retirement, these are going to be taxed at the income tax rate. A Roth IRA provides you with no tax break for your contribution. However, earnings, as well as withdrawals are tax-free.

A traditional IRA is going to allow you to avoid taxes when you are putting the money in. A Roth IRA will allow you to withdraw without paying any taxes of the funds. Roth IRA contributions are going to be made on an after-tax basis. This allows you to take advantage of the money and tax-free growth. This is especially true if you are in a low tax bracket at the moment.

Keep in mind that both IRAs are not going to tax you on the growth of the funds contributed as long as they are in the account and not withdrawn.

Withdrawal Rules

The big difference between the two is when your savings must be withdrawn. A traditional IRA is going to make you take out minimum distributions at the age of 70 ½. This is whether you need the money or not. With Roth IRAs, you are not going to have to take out any money during their lifetime. You can allow the Roth income to grow throughout your entire life. This is also true for beneficiaries. If someone benefits a Roth IRA, they do not have to pay taxes on the income.

For both traditional and Roth IRAs, the owner is going to be able to take a distribution out at the age of 59 ½ without any penalties. However, a Roth IRA is going to make you have your contribution 5 years before you can withdraw anything. This is to avoid any tax reoccurrences.

Providers

Keep in mind that there are many providers out there for both traditional IRAs and Roth IRAs. Some providers provide both IRA’s while some only provide one or the other. It is up to you to decide which one is best for you and your family. There are a lot of deciding factors that are going to play a role in which one you choose.

Conclusion

Whether you are choosing a traditional IRA plan or a Roth IRA plan, you are going to receive benefits when it comes to your taxes and deductions. However, it is up to you to determine which one you are going to want to use for your family. You also want to keep in mind what this money will most likely be used for in the future. You may only need the basic traditional but some people may need the Roth IRA plan.  Ultimately it is up to you to determine what is best for you as an individual.