Traditional IRA VS. Roth IRA

More commonly known as an IRA, the Individual Retirement Account is exactly what it sounds like. An IRA is a tool used to put away investments for your retirement. An IRA allows you the opportunity to earn and earmark funds for yourself later on in life.

Understanding the difference between a Roth IRA and a Traditional IRA is very important as using one or the other can have a great impact on yourself and your family’s savings in the long term. While there are a great many variables between the two, but we are going to look at the primary differences that will ultimately affect your decision on which option is best for you and yours.

Traditional IRAs come with a specific age restriction. Any individual who is receiving an earned income from their employer and is under the age of 70 & ½ may contribute to their Roth IRA. Now, there are some variables when it comes to whether or not what you contribute to your IRA is tax deductible. If you or your spouse have a 401(k), or a similar retirement plan already in place that can change your contribution’s tax deductible status as can the level of your income.

Roth IRAs do not bear an age restriction. This means that you’re never too young (or too old, for that matter) to get started. The restrictions that Roth IRAs carry are more related to your income. The breakdown can be a bit tricky so allow us to explain.

If you are a single tax filer then your modified adjusted gross income (AGI) may not exceed $135,000.00 (up $2,00.00 from 2017).

If you are a married couple that is filing jointly then your modified AGI may not exceed $199,000.00 (up $3,000.00 from 2017).

Roth IRAs and Traditional IRAs both offer tax breaks. Contributions to your Traditional IRA are tax-deductible on both the State & Federal level for the calendar year in which the contributions were made. Neither your Roth nor your Traditional IRAs offer tax breaks for your contributions, but you are generally able to avoid taxes when retrieving your funds during retirement. You should also know that (as long as the funds are still in their respective accounts) you will pay no taxes on the increases that you see to the funds you’ve contributed.

There are rules in regards to the withdrawal process for you your IRA, specifically when you may begin withdrawing your funds. Once you’ve reached 70 & ½ years of age your Traditional IRS will require that you begin withdrawing from your account. Roth IRAs do not require this. In fact, with a Roth IRA, you can leave that money untouched for the entirety of your life, if you so desire. Both Roth and Traditional IRAs will allow you to begin making withdrawals at the age of 59 & ½.

Lastly, it is important to note that Both Roth and Traditional IRAs have a plethora of investment opportunities, from individual stocks to index funds.