What is an IRA?
To begin with, Traditional IRAs and Roth IRAs are two common individual retirement arrangements. That being said, Traditional IRAs are common if your income is more than the amount to qualify for a Roth IRA. You’re also eligible for a tax deduction and expect to be in the lower tax bracket in retirement.
On the other hand, Roth IRAs are common for individuals with a Modified Adjusted Gross Income (MAGI) who are below the limit, want tax-free withdrawals, avoid minimum distributions, or expect to be in the same or higher tax bracket in retirement.
In other words, Traditional IRAs are tax deductible. The amount you deduct is based on the tax year. Roth IRAs are not tax deductible.
There are key differences between the two IRAs.
- One tax benefit is that there are tax-deferred growth and tax-deductible contributions.
- You can contribute until you are 70 ½ years old.
- Your income does not affect your contributions. There is no limit to the contributions you make.
- If you withdraw pre-tax contributions and earnings, you must pay taxes.
- You will have a 10% early withdrawal penalty if you withdraw before the age of 59 ½ years old.
- The Required Minimum Distributions (RDMs) is the minimum amount you are required to withdraw from your IRA each year. This must be taken in the year that you turn 70 ½.
- One tax benefit is that there are tax-free growth and tax-free withdrawals.
- You can contribute at any age.
- Your income affects your contribution amount.
- You are not subject to withdrawal taxes when withdrawing contributions and can withdraw earnings without paying federal income taxes.
- You will have a 10% early withdrawal penalty and a 10% additional tax if you withdraw before 59 ½ years old.
- The Required Minimum Distributions (RDMs) do not apply.