Roth IRA vs Traditional IRA: Know The Difference
Updated September 2022
Undeniably, saving for retirement is important, yet many of us have found reasons to put it off. There are many ways to start saving for your future now. One great way is to open an Individual Retirement Account (IRA). Launch CU offers two types of IRAs; Traditional IRA and Roth IRA. If you do not know the difference between a Roth IRA and a Traditional IRA, you are not alone. This post will help you understand the differences, and allow you to pick the best option for you and your financial future.
What Is An IRA?
An IRA is a personal retirement savings plan that may offer you tax advantages – consult your tax advisor. Congress developed IRAs to encourage retirement savings by individual taxpayers.
Roth IRA
If you set up a Roth IRA, you make contributions with money you already have paid taxes on. Then, your money has the potential to grow tax-free. In addition, a Roth IRA provides tax-free and penalty-free contribution withdrawals for any reason, at any time. You can withdraw dividend earnings tax-free after you have met a five-year holding period and withdraw funds for a qualified reason.
Roth IRAs do not have an age restriction in order to start contributions. They do not have a required minimum distribution. If you perform a non-qualified withdrawal, it is subject to taxation of earnings, and a 10% additional tax. There are income limits that apply to make contributions towards a Roth IRA. Consult your tax adviser for more information on taxes and withdrawals and income limits for making contributions.
Traditional IRA
Comparatively, A Traditional IRA operates differently in a few ways from a Roth IRA. First, you must be under the age of 70.5 at the end of the tax year to open or make contributions to a Traditional IRA. You must also start taking the required minimum distributions at the age of 70.5. For some, contributions may be tax-deductible. Consult your tax adviser for eligibility. In addition, there are no income restrictions on your contributions. If you wish to withdraw the money from your Traditional IRA before the age of 59.5, there may be a 10% early withdrawal penalty. Consult your tax adviser for all taxes and penalties that may apply.
Roth IRA vs. Traditional IRA Comparison Chart
| Traditional IRA | Roth IRA |
|---|---|
| Contributions with money that you may be able to deduct on your taxes | Contributions with money you have already paid taxes on |
| Tax-deferred growth | Tax-free growth |
| Must be under the age of 70.5 to make contributions | No age restriction to make contributions |
| Must start taking required minimum distributions after age 70.5 | No minimum required distributions during the lifetime of the original owner |
| Withdrawals before the age of 59.5 may be subject to a 10% early withdrawal penalty | Non-qualified withdrawals may be subject to a taxation of earnings, and a 10% additional tax |
| Pay taxes on withdrawals | Tax-free and penalty-free contributions withdrawals for any reason, at any time. Can withdraw dividend earnings tax-free after a five-year holding period, and for a qualified reason |
| No income restrictions on contributions | Income restrictions on contributions apply |
Overall, for both Roth & Traditional IRAs, the maximum contribution per year is $5,500 for those under the age of 50. For those over the age of 50, the maximum contribution per year is $6,500. The maximum yearly contribution amount is not to exceed the amount of your eligible taxable income.
