Deciding on a Roth vs traditional IRA to ensure retirement needs are met in the best way should only be done after thoroughly comparing both products. While both are qualified retirement accounts, there are many differences between the two. The information below summarized the pros and cons of each product.
Overview of Roth vs Conventional or Traditional IRA
Roth and traditional individual retirement accounts have many similarities, and some key differences. First, both are qualified retirement vehicles providing tax benefits to the account owner. They both work under government regulations that control deposits, known as contributions, and withdrawals, called distributions.
Contribution amounts are limited and certain requirements must be met in order to avoid penalties on distributions. Both accounts require the individual to have compensation or spousal compensation during the tax year they are opened, but there is no age limit for opening a Roth vs traditional IRA account, which requires the person to be under 70 ½ years of age at opening.
Contributions
While both limit the contribution amounts to the lesser of $5,000 or the person’s total annual compensation, traditional individual retirement accounts are funded with pre-tax dollars and Roth accounts are not.
This means that a person with an annual income of $35,000 who contributes $5,000 into his traditional IRA will only claim and pay taxes on an adjusted annual income of $30,000, which obviously puts more money back into the person’s pocket.
The same person contributing into a Roth IRA will still claim $35,000 for his annual income, regardless of the contribution to the individual retirement account.
Contributions can only be made into traditional IRA accounts until the person reaches 70 ½ years, but there is no limit to contributions made into a Roth IRA. This makes the question of Roth vs traditional IRA seem easy to answer, but in reality it is only half of the picture. There are also many distribution variables that effect the decision.
Distributions
For owners of traditional IRAs, distributions can be taken when the person reaches 59 ½ years of age and are required at 70 ½. Both the contributed funds and the earning are taxable during the year of the distribution. Distributions can be made from a Roth IRA after the account has been opened for five tax years as long as the person has reached 59 ½ years of age.
There are no required distributions at any age for Roth IRAs. Since the funds were taxed during the year of contribution, only the earnings are taxable when distributions are taken from Roth IRAs.
Whether a person should open a Roth vs traditional IRA is a personal choice. The right product depends on a person’s age, income and individual situation. It is best for a person to get advice from a financial professional before opening a retirement account to ensure the vehicle will afford the most appropriate tax benefits and provide the best situation at retirement time.
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