Traditional vs. Roth IRAs

The features of these two retirement programs are quite different.  Let’s look at the main differences between each retirement program. Lorraine from Beverly, Massachusetts, “Finding the right retirement plan for me and my family was easy once I understood the main differences between the Traditional and Roth IRA.  My family’s financial advisor was able to help us pick the right plan for us. The peace of mind that I am planning ahead for our retirement is wonderful.”

Traditional IRA – This type of retirement account was created in 1974 and is held by approximately 36 million people in American households. Traditional IRAs allow individuals to make tax deductible contributions up to a certain limit. Distributions from this type of IRA are taxed as ordinary income.  If taken before age 59 ½ there is a 10% federal tax penalty. For workers covered by an employer retirement plan at work, the deduction for a traditional IRA in 2014 is phased out for incomes between $96,000 and $116,000 for married couples filing jointly or from $60,000 and $70,000 for single filers.

Roth IRA – This type of retirement account was created as part of the Taxpayer Relief Act in 1997. It is owned by 19.1 million American households. Individuals can make contributions to a Roth IRA up to certain limits. To qualify for tax-free and penalty-free withdrawals of earnings, Roth IRA distributions must meet a five year holding requirement and occur after age 59 ½. Contributions are limited based upon income. For 2014, contributions to a Roth IRA are phase out between $181,000 and $191,000 for married couples filing jointly and between $114,000 and $129,000 for single filers.

There are also rules that apply to contributing to either type of IRA.  Account owners cannot contribute more than $5,500 per year toward a combination of both types of IRAs. For example, if a person puts $3,500 toward a traditional IRA, that person would be limited to contribute $2,000 to their Roth IRA in the same year. For people over 50, “catch up” contributions may be made. The combined limit for these is $6.500. These two retirement plans are only part of the retirement picture. Once you have figured out which works best for your situation the only thing left to do is…open an account.