Traditional and Roth IRAs are powerful tax-deferred savings tools for individuals and self-employed people.
- Anyone with earned income can open and contribute to a traditional IRA, up to the maximum annual contribution limit, which is periodically adjusted for inflation.
- Contributions are fully tax deductible if neither you nor your spouse actively participates in an employer-sponsored retirement plan.
- A married couple generally can contribute twice as much to an IRA as an individual, even if one spouse doesn't work outside the home.
- Combined contributions cannot exceed the maximum annual contribution limit, which is periodically adjusted for inflation.
- If one of you does participate in an employer-sponsored plan, your IRA deduction may be limited or eliminated, depending on your adjusted gross income.
- Even if you can't deduct your contributions, you can still save for retirement in a traditional IRA by making nondeductible contributions.
- Traditional IRA investments grow tax deferred until you begin withdrawals from the IRA. Then, withdrawal amounts attributable to your deductible contributions and investment earnings will be subject to federal (and possibly state) income tax.
- Contributions to a Roth IRA aren't deductible, nor are they taxed when distributed.
- After you've had a Roth IRA for at least five tax years, withdrawals of investment earnings are tax free if you're at least age 59½, become disabled or withdraw up to $10,000 for first-time home buying expenses.
- A married couple generally can contribute twice as much to an IRA as an individual, even if one spouse doesn't work outside the home.
- Combined contributions cannot exceed the maximum annual contribution limit, which is periodically adjusted for inflation.
This chart compares the features of traditional and Roth IRAs.
| Compare Traditional and Roth IRAs |
| |
|
Traditional IRA |
| |
Roth IRA |
Deductible 1 |
Nondeductible 1 |
| Earnings grow tax deferred |
Yes |
Yes |
Yes |
| Contributions are taxed on withdrawal |
No |
Yes |
No |
| Earnings are taxed on withdrawal |
No 2 |
Yes |
Yes |
| Contributions are tax deductible |
No |
Yes |
No |
| Contributions allowed after age 70½ |
Yes |
No |
No |
| Minimum withdrawals required after age 70½ |
No 3 |
Yes |
Yes |
1 Contributions to a traditional IRA may be deductible depending on your (and your spouse's) participation in the employer-sponsored retirement plan and your (and your spouse's) AGI. Your financial advisor can tell you if you qualify for a tax-deductible IRA.
2 After the account has been open for five tax years, a withdrawal of earnings from a Roth IRA is not subject to income tax or the 10% early withdrawal penalty if the individual is at least 59½, or dies, is disabled or uses up to $10,000 of the account's earnings for a first-time home purchase. Withdrawals of contributions are not subject to income tax and may not be subject to the 10% early withdrawal penalty.
3 During the account owner's lifetime only; RMD must be taken from inherited Roth IRAs.
This information is not intended as tax advice. Investors should consult a tax advisor.
