Roth vs. Traditional IRA: Which is Best for You?
- How to Qualify for a Traditional IRA
- Contributions and limits
- Which is better: Traditional or Roth IRA?
- The bottom line
What is an IRA?
How to Qualify for a Traditional IRA
- If you make under $66,000 per year (gross income) and are a single file OR if you make under $105,000 per year (gross income) jointly, you can deduct the entire amount of your IRA contributions from your tax return.
- If you make over $66,000 AGI per year, you’ll be eligible for a partial deduction that will phase out at $76,000. Joint filers making over $105,000 will also receive incremental deductions that will phase out at $125,000.
- $139,000 AGI or less for single filers
- $206,000 AGI or less for joint filers/married couples
Contributions and limits
- Under 50 years of age - $6,000 per year
- Over 50 years of age - $7,000 per year
Pros and Cons
Traditional IRA Pros
- Reduce taxable income. If you’re eligible for a deductible traditional IRA, any contributions made in that year will be deducted from your taxable income. This will decrease the amount of income tax you’ll pay that year.
- Wide eligibility requirements. One of the main perks of traditional IRAs is that they’re available to anyone earning taxable income under the age of 70½. There are no income restrictions to open a traditional IRA, though there are restrictions regarding whether contributions are deductible.
Traditional IRA Cons
- Contribution limits. Once you turn 70½, you’re no longer allowed to continue contributing to your traditional IRA.
- Minimum distribution requirements. Once you turn 70½, you’re required to begin taking out required minimum distributions each year.
Roth IRA Pros
- Tax-free retirement withdrawals. Since you contribute to a Roth IRA post-tax, you’ll be able to take out distributions without paying tax on them in retirement.
- Access to contributions before retirement. Although it’s advantageous to leave your Roth IRA alone until retirement, if you do need to withdraw funds sooner, you have full access to your contributions without incurring a penalty from the IRS.
- No age limit on contributions. If you have a Roth IRA, you can continue making contributions after the age of 70 ½, unlike with a traditional IRA.
Roth IRA Cons
- No yearly tax deductions. Since you won’t be subject to an income tax on your distributions in retirement, you’re not able to deduct contributions on your taxes.
- Not available for higher income tax brackets. If you make above the Roth IRA income limits, you won’t be eligible to open or contribute to this type of retirement account.
Which is better: Traditional or Roth IRA?
Does it make sense to have both a traditional and Roth IRA?
Should I convert a traditional IRA to a Roth IRA?
What is the 5-year rule for Roth IRAs?
The bottom line
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