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Should you Contribute to a Roth or Traditional IRA Account?

February 12th, 2018 | Written by

Roth or Traditional IRA

Before you decide if you should contribute to a Roth IRA or Traditional IRA account, it is important to understand the difference between these two individual retirement accounts.  While a Traditional IRA and Roth IRA have the same goal to save for your retirement, these accounts have a slightly different strategy of accomplishing that goal.  Below is a table comparing a Traditional IRA vs a Roth IRA to help you to decide which is best for you.

Traditional IRA Roth IRA
What is the difference between a Traditional IRA and a Roth IRA? Individual retirement account where contributions are made with pre-tax dollars. Individual retirement account where contributions are made with after-tax dollars.
What are the tax benefits? Tax-deferred growth and maybe tax-deductible contributions

(subject to limitations)

Tax-free growth and tax-free qualified withdrawals
Is there a contribution limit?

 

$5,500 OR your taxable compensation for the year if less than $5,500.

Additional $1,000 for individuals age 50 and older.

 

$5,500 OR your taxable compensation for the year if less than $5,500.

Additional $1,000 for individuals age 50 and older.

 

Are there age requirements to contribute? Can contribute until the year you turn 70 ½ years.

 

No requirements, can contribute at any age.
Are there income requirements to contribute?

(2018 tax law)

 

There is no income limit to contribute.

 

Single filers earning up to $120,000 can make full contribution. Partial contribution applies to income $120,000 – $135,000.

Joint filers earning up to $189,00 can make full contribution per spouse. Partial contribution applies to income $189,000 – $199,000.

 

What happens if I withdraw before age 59 ½?

 

You will be subject to income tax and an additional 10% early withdrawal penalty tax if you do not qualify for early distribution exceptions.

 

 

You may withdraw any contributions you made tax-free and penalty-free.  After all contributions are withdrawn, you will be subject to income tax and 10% penalty on the earnings, unless you qualify for early distribution exceptions.
What happens if I make a withdrawal after age 59 ½?

 

In general, distributions are subject to income tax in the year you receive them. If your Roth account met the 5-year holding requirement, you can withdraw tax-free.

 

 

Am I required to take a required minimum distribution (RMD)? You are required to take a RMD by April 1st following the calendar year you turn 70 ½. No required minimum distribution.

Talking to your financial advisor can help you to determine which retirement account is the better option for you.  Please do not hesitate to reach out if you have any questions on which option is best for you.

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