Roth vs Traditional IRA

The one question that most Americans want to know the answer to is which is better when you look at Roth vs Traditional IRA accounts.  This article will briefly outline each account type and then compare them side by side in major factors.

Roth IRA

The Roth IRA was created to give owners more flexibility with their account and features tax free withdrawals and greater ease to withdraw contributions.  There is a lot of information on the Roth IRA on this site already, if you would like more in-depth detail please refer to our other articles.

Traditional IRA

The Traditional IRA was made created before the Roth IRA and therefore was not made with the same hindsight available.  This type of savings account allows the owner to make significant tax deductions on contributions, but they have to pay taxes when they withdraw later on.  The contribution eligibility however is much less strict than the Roth IRA, which is why many high earning citizens opt for the Traditional IRA.

Roth vs Traditional IRA Benefits and Negatives

To accurately portray the Roth vs Traditional IRA comparison we will look at the main features of each arrangement side by side.

 

Aspect Roth IRA Traditional IRA
Contributions If you make over a certain amount during the year of taxable income, you are not allowed to contribute to your account.  The IRA releases these figures every year with adjustments made for inflation. For this year, visit Roth IRA Contribution limits 2012. Anyone with an income is allowed to contribute to their IRA account, although they can only contribute up to their income (which isn’t usually a problem, and applies to Roth IRAs as well).  If your income is too high though, you are not allowed to claim nearly the same amount of tax deductions for contributions.
Contribution Limits The contribution limits are based on after tax amounts, so if your limit was $5,000, and you paid tax on $7,000 of your income and were left with $5,000, you could contribute essentially the whole $7,000 worth. The limits themselves are very similar to the Roth IRA.  However, these are limits based on the tax deducted income amounts, meaning that the hypothetical $5,000 will still require you to pay taxes eventually.
Withdrawals You can withdraw any contributions you have made with no penalty or tax fee.  Also, as long as you have had the account for 5 years and are at least 59.5 years old you can withdraw the earnings as well whenever you want. You pay taxes on your withdrawals based on your tax bracket.  In some cases this can work out favourably.
Distribution No minimum distribution at any age. You are forced to make minimum distributions once you reach 70.5 years old, if you do not make the withdrawal, half this amount will be taken by the IRS.
Other You are allowed to use $10,000 of earnings to help finance a first time house purchase.  This amount is tax exempt.  

Hopefully our Roth vs Traditional IRA comparison has helped you gain insight into the advantages of each, if you want more information on Roth IRAs, please visit our other articles.