Roth vs. Traditional IRA

Traditional IRA vs. Roth IRA: Which is the Best Fit?

Dec 05, 2019

Individual Retirement Accounts (IRAs) are types of savings accounts designed to help you set money away for retirement in a tax-advantaged account. Two of the most common types are traditional and Roth IRAs. How do you know which one you should contribute to? There are several factors to consider, so let’s take a closer look at their similarities and differences to help you choose the best fit.

How They’re Similar

The similarities between Traditional and Roth IRAs include:

  • Contribution limits: Total annual contributions to your traditional and Roth IRAs combined cannot exceed $6,000* if you are younger than 50 or $7,000* if you are age 50 or older.
  • Contribution deadline: The deadline to contribute for the tax year is the same as your tax return filing deadline (not including extensions). So, you can make a 2019 IRA contribution in 2020 up until the tax filing deadline in April.
  • Withdrawals: You can withdraw money at any time, but distributions may be subject to tax and penalty. For traditional IRAs, withdrawals prior to age 59½ may be subject to a 10 percent early withdrawal penalty, unless an exception applies. If you made nondeductible contributions, they aren’t taxed upon withdrawal. For Roth IRAs, withdrawals of the principal are tax and penalty free. If you are younger than 59½ and have had the account for less than five years, however, you may have to pay taxes and/or a penalty on any earnings withdrawn.
  • Rollovers: Direct rollovers are accepted from outside qualified retirement plans (i.e., 401(k)s, 403(b)s), and they may be taxable.
Key Differences

There are, however, some key differences between these account types, as summarized below:

Traditional IRA
 Roth IRA
Who can contribute? Anyone younger than 70½ can contribute to a traditional IRA, regardless of their income. Not everyone is eligible to contribute; income restrictions apply.
Taxes Contributions may be tax deductible, depending on your income level and/or coverage by an employer sponsored retirement plan.

Contributions grow tax deferred, meaning you pay taxes only when you withdraw the money; nondeductible contributions are tax-free when withdrawn.**

Contributions are not tax deductible, but in exchange, distributions are tax free if the account has been open for at least five years and the account owner is age 59½ or has qualified for an early withdrawal exception.
Required Minimum Distributions (RMDs) You must begin taking RMDs at age 70½. Roth IRAs do not have RMDs, and you can continue to contribute even after reaching age 70½.
Learn More

There are a lot of details to take into consideration before deciding on which account to open, and it’s important to be well-informed before making a decision. Visit the IRS website to learn more about IRAs. If you have further questions regarding either type of IRA and which one may be best for you, we’re here to help. Contact us at 1-866-401-5272.

*These limits apply to 2019

**Earnings on nondeductible contributions are not tax free when withdrawn.

Brian Douglas, AIF®, APA, PPC  is Vice President of IRA and Special Services with BPAS Plan Administration & Recordkeeping Services.