Roth IRAs versus Traditional IRAs: The Basics

Practice Areas

By Kapil Handa

Individual Retirement Arrangements (IRA) provide one great way to save for retirement. Roth IRAs and Traditional IRAs are the two types of IRAs that individuals can choose from. These two plans have a few differences, with a major one being when savings are taxed. With the help of a tax professional, individuals deciding between IRAs should consider how each type might work for them.

People in the US can contribute to different types of savings plans to support themselves during retirement. IRAs are just one option, popular for their flexibility.  People should consider a variety of factors when choosing a retirement plan, including:

  • Age
  • Income
  • Retirement goals

What are the Differences Between a Roth IRA and a Traditional IRA?

Roth IRA

Traditional IRA

Annual contribution limit

$5,500 per person

$6,500 if age 50 or older

$5,500 per person

$6,500 if age 50 or older

Taxation at contribution, or when funds are added to the IRA

No income tax deduction at the time of contribution – Money added to the IRA each year is still taxed at regular income tax rates

Income tax deduction is allowed at the time of contribution – Money added to the IRA can be deducted from your income taxes

Taxation at distribution, or when funds are withdrawn from the IRA

Distributions after the age of 59.5 years are tax-free

Distributions after the age of 59.5 years are taxed at the ordinary income tax rates

Distribution rule

Withdrawals are tax-free and penalty-free if you withdraw funds five or more years since the first contribution was made. Funds withdrawn before that date are subject to a 10% penalty.

There is a 10% penalty on all funds withdrawn before the age of 59.5 years.

Income thresholds: Who can qualify?

For single tax filers:

  • Modified adjusted gross income less than $135,000

For married couples filing jointly:

  • Modified adjusted gross income less than $199,000

There are no income thresholds if the taxpayer and their spouse (if applicable) are not covered by a plan at work.

However, income thresholds come into play if the taxpayer’s spouse is covered by a work plan.

For married couples filing jointly:

  • Modified adjusted gross income less than $199,000

 

Conclusion

Individuals should take multiple factors into consideration when choosing the retirement plan that might be right for them. Please contact your experienced Chugh CPA for help choosing a retirement plan.