Traditional IRA vs. Roth IRA: How are they different?

Ken Earwood

October 23, 2016

“What’s the difference between a Traditional IRA and a Roth IRA?” During my 20 years of retirement planning this is one of the most common questions I’ve heard. Below is a comparison that shows how a Traditional IRA is different from a Roth IRA, and how the two are similar as well.

Requirements to Open Account (same):

Traditional IRA - Typically no initial minimum deposit is required to open an account. However, most investment funds have a minimum of at least $1000. [ask your Advisor for details]

Roth IRA - Typically no initial minimum deposit is required to open an account. However, most investment funds have a minimum of at least $1000. [ask your Advisor for details]

Age Limit (different):

Traditional IRA - You must be under 70 ½ to contribute.

Roth IRA - You can contribute at any age.

Income & Contributions (different):

Traditional IRA - Contribution can’t exceed yearly income. Contribution can’t exceed IRS limits. No additional income restrictions.

Roth IRA - Contribution are after-tax dollars and can’t exceed yearly income. Contribution can’t exceed IRS limits. Contribution could be reduced based on your modified adjusted gross income.

Minors & Nonworking Spouses Contributions (same):

Traditional IRA - Check special income rules. It’s possible that minors and nonworking spouses can contribute.

Roth IRA - Check special income rules. It’s possible that minors and nonworking spouses can contribute.

2016 Tax Year Contribution Limits (same):

Traditional IRA - Up to $5,500 if you’re under age 50. Up to $6,500 if you’re age 50 or older. Limits could be lower based on your income.

Roth IRA - Up to $5,500 if you’re under age 50. Up to $6,500 if you’re age 50 or older. Limits could be lower based on your income.

Contributions & Tax Deductions (different):

Traditional IRA - Some or all of your contributions may be tax deductible. Your deductible amount could be affected if your spouse has an employee retirement plan.

Roth IRA - Contributions are not tax deductible.

Yearly Contribution Deadlines (same):

Traditional IRA - April 15th of the following year.

Roth IRA - April 15th of the following year.

Taxes on Withdrawals (different):

Traditional IRA - If you withdrawal money you pay income tax on earnings. Also if you withdrawal money you will pay income tax on the any contributions you deducted on your taxes.

Roth IRA - If you withdrawal money you do not pay any taxes on your contributions. You won’t pay taxes if you withdrawal money from earnings if you’ve reached 59 ½ years of age and you’ve met a 5 year holding period requirement.

Withdrawal Penalties (different):

Traditional IRA - There is a 10% federal tax penalty on all withdrawals, both contributions and earnings.

Roth IRA - There is a 10% federal tax penalty on earnings withdrawals. But there is no penalty on contribution withdrawals.

Required Minimum Distributions (different):

Traditional IRA - By April 1st of the year following the year you reach age 70 ½ you must take your first RMD (Required Minimum Distribution). After that you will need to take your RMD each year by December 31.

Roth IRA - During your lifetime there are no RMDs.

Earning on IRA Investments (different):

Traditional IRA - Earning grow on a tax-deferred basis. Earnings are added to taxable income for the years distributed.

Roth IRA - Earnings grow tax deferred. Qualified distributions are tax free, including distribution of earnings.