Traditional vs. Roth IRA

Choosing which retirement account to go with can be difficult and confusing at times. Here are some facts to help when you are trying to decide with which one to go.

Both Traditional and Roth have the same amount for the maximum contribution level. With Traditional you may be eligible to deduct your contributions and get a tax break for that year that you make your contribution. In order to be eligible you have to pass certain requirements first which are:

  • the taxpayer's filing status
  • the taxpayer's modified adjusted gross income (MAGI)
  • the active-participant of the taxpayer

You need to consider how long you want to contribute into your account also. For the Traditional you can't make anymore contributions after 70.5 years of age. With the Roth you can make contributions as long as you want to.

Another consideration when determining which retirement plan to go with is how much income you have coming in. You are not eligible to participate in a Roth if you fall under any of the following:

  • If you make more than $166,000 and are married filing a joint tax return.
  • If you make more than $10,000 and are married while living with your spouse for any part of the tax year, but are filing separately.
  • If you make more than $114,000 and are filing single, head of the household, or married and filing separately if you did NOT live with your spouse at any time during that tax year.

If you already have a Roth and your income falls into a certain range, then your Roth contribution limit may be lowered. With Traditional you don't have any income caps to deal with.

Another difference between Traditional and Roth is that with a Traditional you are required to start taking out what are called required minimum distributions (RMD). This means you have to start taking money out of your account by April 1 of the following year after you turn 70.5 whether you need the money or not. The amount you take out gradually reduces the balance of your IRA and also has to be added to your income. With a Roth you are NOT required to take out any required minimum distributions.