Learn about saving for retirement by understanding the differences between the various IRA options.
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A Traditional IRA is the oldest and most common type of Individual Retirement Account. A Traditional IRA grows on a tax-deferred basis and contributions may be fully deductible, partially deductible or non-deductible. If you have earned income, you can contribute to a traditional IRA until the year you attain 70½ years of age.
Reasons to consider a Traditional IRA
- You anticipate your tax rate at retirement to be lower than your current tax rate.
- You are not eligible to make a Roth IRA contribution because your income exceeds the limitation (See More Information about Roth IRAs).
- You need a tax deduction to lower your current tax bill and qualify to make a deductible IRA contribution.
- You have a 401(k) or other account in a former employer’s plan and you want to self-direct the funds through a Self-Directed IRA.
If you are eligible to contribute to an IRA, the amount you can deduct from your taxes will depend on whether you (or, in some cases, your spouse) are an active participant in a retirement plan at work. (See Internal Revenue Service Publication 590-A for more information.)
The Roth IRA is similar to the Traditional IRA in many ways, but there are some significant differences in the tax treatment of contributions and distributions. Contributions to a Roth IRA are not tax deductible, but qualified distributions from a Roth IRA are not taxed at all.
Distinguishing Features of a Roth IRA
- Contributions are not tax deductible.
- Qualified distributions from a Roth IRA are not taxed at all.
- A qualified distribution is a distribution that occurs after the account holder has attained age 59 1/2 and has maintained a Roth IRA for at least five years.
- Contributions (but not investment earnings) can be removed at any time without tax or penalty.
- Contributions can be made to Roth IRA after age 70 1/2 but not to a Traditional IRA.
- There are restrictions on who is eligible to make Roth IRA contributions. Individuals with income above a certain level may not make Roth IRA contributions.
Reasons to consider a Roth IRA
- You anticipate your tax rate at retirement to be higher than your current tax rate.
- You are eligible to make a Roth IRA contribution but you are not eligible to make a deductible Traditional IRA because you or your spouse are covered by a retirement plan at work. (See IRA Publication 590-A).
- You qualify to make a deductible IRA contribution but do not need a tax deduction to lower your current tax bill.
- You have a Roth 401(k) at work but do not currently have a Roth IRA. You should open a Roth IRA to start the “five year clock” so that you will have satisfied the five year holding period by the time your Roth 401(k) is rolled over to your Roth IRA.
Eligibility for a Roth IRA
The amount that you can contribute to a Roth IRA is affected by your modified adjusted gross income and your income tax filing status. If you have earned income and your modified adjusted gross income is less than the amounts below, you may contribute to a Roth IRA, but you may not be able to contribute the maximum amount. See the IRS website for more information: 2017 Roth IRA Contribution Limits and 2018 Roth IRA Contribution Limits.
Married Individuals filing jointly
- $196,000 for 2017
- $199,000 for 2018
Single or head of household
- $133,000 for 2017
- $135,000 for 2018
Married filing separate returns