Traditional IRA vs. Roth IRA

TRADITIONAL VS ROTH IRA - WHICH IS RIGHT FOR YOU?

Do you need the tax deduction now to help reduce your tax burden or increase your yearly refund? If yes, a Traditional IRA is right for you. If you expect to be in a higher tax bracket when you retire, the Roth IRA may benefit you more since Roth IRA contributions are nondeductible and taxed in the year they are earned.

If you want to leave your funds to family members in your estate, the Roth may be your preferred choice since it does not require you to take distributions at any age. You must begin taking distributions from your Traditional IRA at age 70½.

What's the difference between a Traditional IRA and a Roth IRA?

A Traditional IRA is an account that allows you to defer taxes on the earnings on your contributions until they are withdrawn. Also, certain contributions are tax deductible in the year they are made. All earnings on your Traditional IRA remain tax-deferred until you make a withdrawal. Then they are taxed as income in the year they are withdrawn.

A Roth IRA allows only nondeductible contributions and features tax-free for certain distribution reasons after a five year holding period. That's the beauty of the Roth IRA. When you are ready to take a withdrawal, you pay no taxes on any of the earnings that your contributions have generated.

Am I Eligible for Either Account?

A Traditional IRA requires you to be under age 70½ for the entire tax year and have earned income (or your spouse has earned income).

A Roth IRA requires you to have earned income (or your spouse) and this income cannot exceed certain maximum limits, although partial contributions can be made for incomes exceeding specified limits.

Roth IRA Phase-Out Range & Limits

Year....................Single.....................Married Filing Jointly

2008.........$101,000 - $116,000..........$159,000 - $169,000

2009.........$105,000 - $120,000..........$166,000 - $176,000

2010..............Limit removal..................Limit removal

You can contribute to a Roth IRA if your income falls below the Roth limits. You're allowed a prorated contribution if your income falls within the "phase-out" range. If your income exceeds the income range you won't qualify for a Roth IRA contribution.

How much can I contribute?

For 2008, the contribution amount for both the Traditional IRA and ROTH IRA is $5,000 per person. For individuals 50 or older an additional "catch-up" provision applies of $1,000 making the maximum amount that can be contributed for both the Traditional and Roth IRA $6,000. These same contribution limits are in effect for the year 2009.

These limits can be a combination of contributions to Traditional and Roth IRAs. However, the total contributions in any combination cannot exceed the above stated limits.

What are my restrictions if I already participate in an employer-sponsored retirement plan such as a 401K, SEP or other qualified plan?

You can contribute the maximum amount to a Traditional or Roth IRA if you are already participating in an employer-sponsored retirement plan. However, the amount you can deduct for tax purposes on a Traditional will vary based on your modified adjusted gross income and tax filing status. There are no tax deduction capabilities associated with the Roth IRA.

When can I withdraw funds without incurring the 10% Premature Distribution Penalty Tax?

Penalty Free withdrawals can be made on a Traditional IRA anytime after age 59½ or under qualified circumstances. The Roth IRA does not have an age limit but does require the funds remain in the account for five years and that certain qualified circumstances exist. The qualified circumstance for both the Traditional IRA and Roth IRA include but are not limited to the following:

  • First-Time Home Purchase
  • Higher Education
  • Disability
  • Medical Expenses

When must I withdraw my funds?

The Traditional IRA requires regular minimum distributions begin in the year you reach age 70½.

So, Which is the right investment for you...the Traditional or the Roth IRA?

You decide which is a greater priority for you: minimizing your taxes now through a deduction or minimizing your taxes in the future with tax-free earnings.

Still have questions?

Contact Us to obtain a free brochure or to speak to one of our IRA Specialists. We will explain the nature of these accounts in more detail.