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How are Traditional and ROTH IRA's different?

Traditional IRA

An individual may be able to deduct the contribution from taxable income (up to the annual contribution limit for the year), reducing current income taxes. Taxes on investment growth and dividends are deferred until the money is withdrawn. Withdrawals are taxed as additional ordinary income when received. Nondeductible contributions, if any, are withdrawn tax-free. Withdrawals before age 59 1/2 are assessed a 10% penalty in addition to income tax, unless an exception applies.

Roth IRA

Contribution limits are essentially the same as for Traditional IRAs, but there is no tax deduction for contributions. All dividends and investment growth in the account are tax-free. With a Roth IRA, there is no income tax on qualified withdrawals. Additionally, unlike a Traditional IRA, there is no rule against making contributions to Roth IRAs after turning age 70 1/2, and there's no requirement that you begin making minimum withdrawals at that age.

The major differences between a Traditional IRA and a Roth IRA:

CharacteristicsTraditional IRARoth IRA
Eligibility
  • Individuals (and their spouses) who receive compensation
  • Individuals age 70 1/2 and over may not contribute
  • Individuals (and their spouses) who receive compensation
  • Individuals age 70 1/2 and over may contribute
Tax Treatment of Contributions
  • Subject to limitations, contributions are deductible
  • No deduction permitted for amounts contributed
Contribution Limits
  • Individuals may contribute up to the tax law limit*
  • Deductibility depends on income level for individuals who are active participants in an employer-sponsored retirement plan
  • Individuals may generally contribute up to the tax law limit*
  • Ability to contribute phases out at income levels of $95,000 to $110,000 (individual taxpayer) and $150,000 to $160,000 (married taxpayers)
  • The tax law limit* applies to combined contributions to Traditional and Roth IRAs (but not including SEP or SIMPLE IRAs)
Earnings
  • Earnings and interest are not taxed when received by your IRA
  • Earnings and interest are not taxed when received by your IRA
Rollover/Conversions
  • Individual may rollover amounts held in employer-sponsored retirement arrangements (401(k), SEP IRA, etc.) tax free to Traditional IRA
  • Individuals may rollover amounts held in Traditional IRA to employer-sponsored qualified plan
  • Rollovers from other IRAs only
  • Amounts rolled over (or converted) from another Traditional IRA are subject to income tax in the year rolled over or converted
  • Amounts held in Roth IRAs may not be rolled over into employer-sponsored qualified plans
Withdrawals
  • Total (principal + earnings) taxable as income in year withdrawn (except for any prior non-deductible contributions)
  • Minimum withdrawals must begin after age 70 1/2
  • Not taxable as long as a qualified distribution - generally, account open for 5 years, and age 59 1/2
  • Minimum withdrawals not required after age 70 1/2
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