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

Retirement Planning
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An old man sitting on a bench contemplating the differences between a roth IRA and traditional IRA

It's important to understand the differences between a Roth IRA and traditional IRA. Each has similar benefits and features, but they also have unique qualities that set them apart. To help you decide which retirement account is right for you, here are some considerations.

Potential Benefits & Features of a Roth IRA

A Roth IRA is an individual retirement account that is designed to help an individual save for retirement on an after-tax basis. Gains and interest from investments in a Roth IRA are not taxed while held in the account. Withdrawals made from a Roth IRA after reaching age 59 1/2 are tax-free and penalty-free, with certain requirements.

Here are the main potential benefits and features of a Roth IRA:

  • You can make after-tax contributions up to $6,000 per year under age 50, or $7,000 per year for individuals age 50 and over.
  • Growth on investments held in the account typically does not incur taxes.
  • Withdrawals at retirement are typically not subject to taxes if the Roth IRA has been open for at least five years.
  • There is only a 10% penalty on early withdrawals made prior to age 59 1/2.
  • Typically, withdrawals of up to $10,000 for first-time home purchases are not subject to taxes or penalties.
  • There is no required minimum distribution (RMD) at any age.

Potential Benefits & Features of a Traditional IRA

A traditional IRA is an individual retirement account that is designed to help an individual save for retirement on a pre-tax basis. Investments in a traditional IRA grow tax-deferred while held in the account. Withdrawals made from a traditional IRA after reaching age 59 1/2 are penalty-free but are taxed at the individual's current federal income tax rate.

Here are the main potential benefits and features of a traditional IRA:

  • Those under age 50 can make pre-tax contributions up to $6,000 each year, or up to $7,000 a year for individuals age 50 and over.
  • Contributions reduce the individual's taxable income by the same amount as the contribution for the tax year it is contributed.
  • Growth on investments held in the account is tax-deferred.
  • First-time home purchasers can make penalty-free withdrawals of up to $10,000.
  • There is a 10% penalty on early withdrawals made prior to age 59 1/2.
  • Withdrawals after age 59 1/2 are penalty-free and taxed at the individual's current federal income tax rate.
  • RMDs begin at age 72 (70 1/2 if you reached 70 1/2 by January 1, 2020). Due to the CARES Act, no RMDs are required for taxable year 2020.
  • There is no income limit on nondeductible contributions.

Roth IRA vs Traditional IRA: The Key Differences

Roth IRAs and traditional IRAs share similar benefits and features. But there are a few key differences between a Roth IRA and traditional IRA that investors should know before choosing a retirement account.

Here are some key differences that you should know about a Roth IRA vs traditional IRA:

  • Tax treatment on contributions: Roth IRA contributions are made on an after-tax basis, whereas traditional IRA contributions are made on a pre-tax basis.
  • Tax treatment on growth: Typically, investments grow without incurring taxes in a Roth IRA, whereas traditional IRAs offer tax-deferred growth. The bottom line effect is similar. As long as you keep your money in a Roth or traditional IRA, you will not be taxed.
  • Tax treatment on withdrawals: Roth IRA withdrawals are typically exempt from taxes if they meet certain qualifications, whereas traditional IRA withdrawals are taxed at the individual's current federal tax bracket during the year they are withdrawn.
  • Income limits on contributions: For Roth IRAs, contribution limits begin to phase out and are reduced incrementally starting at $125,500 for single filers and $198,000 for married couples filing jointly. For traditional IRAs, contribution limits begin to phase out starting at $66,000 for single filers and $105,000 for married couples filing jointly.
  • Non-deductible contributions: There is no income limit on nondeductible contributions to a traditional IRA. Roth IRAs do not have this feature. This can be beneficial for high-income earners.
  • Required minimum distributions: There are no RMDs for Roth IRAs, whereas RMDs for traditional IRAs must begin no later than April 1 of the calendar year after you reach age 72 (or 70 1/2 if you reached that age by January 1, 2020).

Bottom Line

When choosing between individual retirement accounts, you're basically choosing when you want to be taxed — now or at retirement. Generally, it may be helpful to contribute to a Roth IRA when you are younger and presumably in a lower tax bracket. Traditional IRAs are generally desirable for high-earning individuals who will benefit from reducing taxable income now.

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IMPORTANT DISCLOSURES
Information provided is general and educational in nature, and all products or services discussed may not be provided by Western & Southern Financial Group or its member companies (“the Company”). The information is not intended to be, and should not be construed as, legal or tax advice. The Company does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. Consult an attorney or tax advisor regarding your specific legal or tax situation.