Traditional IRA vs. Roth IRA
Individual Retirement Accounts (IRAs) can be a great investment option to help you save for a secure, comfortable retirement. Your earnings on a traditional IRA are tax-deferred until you make retirement withdrawals, which will keep your money working for you year after year. Choosing which IRA is best for you depends on the tax benefits that you prefer.
Annual contributions are similar for both accounts -- up to $5,000 per person or $6,000 for individuals who are 50 and above. The differences between accounts are potential tax breaks and flexibility in terms of funding and withdrawing funds.
Traditional IRA |
Roth IRA |
|
|---|---|---|
| Are there tax deductions for contributing to an IRA? | Yes, if income eligibility requirements are met | No |
| Required minimum distributions? | Yes, by age 70 ½. Distributions must begin by April 1 of the year following the year the individual turns age 70 ½. |
Distributions from a Roth IRA are not required during the individual's lifetime. |
| Tax status of contributions | Pretax contributions reduce current taxable income. | After-tax contributions do not affect current taxable income. |
| Are distributions taxable? | Generally, distributions are taxed as current income. | Tax free and penalty free for investors who have attained the age of 59 ½ and had the account at least five years. |
| Who is eligible to contribute? | Any individual who has taxable compensation and is under the age of 70 ½ during the entire year. | Any individual who has taxable compensation and whose income has met the modified adjusted gross income requirements. |
| How much can I contribute? | Individuals under age 50 may contribute up to $5000 for 2009 and 2010. Individuals age 50 and older may contribute up to $6000 for 2009 and 2010. |
Same as traditional, except that an individual's Roth IRA contribution limit is phased out based on the individuals modified adjusted gross income and tax filing status. |
Although your Roth IRA contributions are funded with after-tax income, your earnings grow tax-free forever. Your money can also be withdrawn tax-free, as long as the account is open for five years and you are age 59 ½ or older. In addition you don't have to take mandatory withdrawals at age 70 ½, and you can continue to make contributions. This can be a great advantage for those who plan to work well past traditional retirement years.
Roth IRAs are only available to individuals whose modified adjusted gross income doesn't exceed the requirement for individuals, or married couples filing a joint tax return. (Click here for more information)
If these criteria do not fit your needs or wants, a Traditional IRA may work better for you. You may be able to claim a full or partial income-tax deduction for your contributions. The Traditional IRA lets earnings grow tax-deferred, so you postpone paying income taxes until assets are taken out of the account. You are required to take distributions by age 70 ½ or you will face penalties. 70 ½ is also the age when you are prohibited from making additional contributions to the Traditional IRA. On the other hand, if you take distributions before age 59 ½, you'll generally pay a 10% penalty.
Regardless of what your situation is or what your needs are, Traditional IRAs and Roth IRAs are excellent tools to save for retirement. Liberty Bank is committed to educating and informing our customers and potential customers with current information about IRAs and we encourage you to contact us with any questions.
Source:
http://www.bankrate.com/brm/green/retirement/traditional_IRA_Roth_IRA.asp
*Since these tips were obtained from public websites and since Liberty Bank does not offer personal finance advice, we do not attest to the accuracy of this information. We recommend that you contact your financial advisor before taking any action.
