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Retirement

Traditional IRA vs. Roth IRA: Which is Right for You?

Two hikers in the woods with a map

Not sure what type of Individual Retirement Account (IRA) is right for you? You’re not alone. Both traditional IRAs and Roth IRAs offer unique benefits, but you’ll need to consider your financial goals to determine what’s right for you.

Tax Deductible vs. Tax Deferred

When comparing traditional IRAs and Roth IRAs, taxes are a key difference between the two types of accounts. Traditional IRAs offer a potentially tax-deductible way to contribute to your retirement, in which your contributions and earnings aren’t taxed until they’re withdrawn. In contrast to a traditional IRA, a Roth IRA is an individual retirement account in which your contributions are made with money you’ve already paid taxes on, allowing “qualified withdrawals” of earnings that are tax- and penalty-free. The table below summarizes other key differences between the accounts.

Traditional vs. Roth Side-by-Side

Contribution Limits

Traditional and Roth Combined Limit
2015: $5,500 total per year; $6,500 if you’re age 50 or older

2016: $5,500 total per year; $6,500 if you’re age 50 or older

Limits could be lower based on your earned income

Contribution Age Limits

Traditional 
No contributions allowed beginning the year you reach 70 ½

Roth
No age limit to open or contribute

Deductions

Traditional
2015 & 2016: Single tax filers with modified AGIs of less than $71,000  (phase-out begins at $61,000); joint filers with modified AGIs of less than $118,000 (phase-out begins at $98,000) 

If neither of you is an active participant in a 401(k) or other qualified employer-sponsored retirement plan, your contributions may be deductible. See IRS Contribution and Deduction Limits for more details.

Roth
Contributions are not tax deductible

Income Limits

Traditional 
Anyone under age 70½ with earned income can contribute

Roth
2015: Anyone regardless of age with earned income and single tax filers with modified AGIs of less than $131,000 and joint filers with modified AGIs of less than $193,000

2016: Anyone regardless of age with earned income and single tax filers with modified AGIs of less than $132,000 and joint filers with modified AGIs of less than $194,000

See IRS Contribution and Deduction Limits for more details.

Distributions

Traditional 
Contributions and earnings may be taxable at withdrawal

Withdrawals before age 59 ½ may be subject to 10% early penalty unless an exception applies

Required Minimum Distribution must begin in the year you turn age 70 ½

See All About Required Minimum Distributions for more information 

Roth
Contributions can be withdrawn tax-free at any time

No Required Minimum Distributions during the Roth IRA owner's lifetime

Distributions can be taken tax and penalty-free if you have had a Roth IRA account for five years AND are:

  • age 59 ½, or
  • purchasing your first home purchase ($10,000 life time limit), or
  • disabled, or
  • it’s an inherited IRA

Early Withdrawal Penalty Exceptions

Traditional and Roth
If you take a distribution prior to age 59 ½, an early withdrawal penalty may not apply if one of these exceptions applies: you are disabled, buying or building a first home (up to $10,000), paying for qualified higher education expenses, covering certain medical expenses, paying medical insurance if unemployed, or if it’s from an inherited IRA.

For Roth IRAs, the early withdrawal penalty applies only to earnings as contributions are not taxable or subject to the penalty.  

See Avoiding Tax Penalties for more details.

Future and Current Tax Brackets

Your tax bracket is the tax rate for the range of income you’re reporting on your federal income taxes. The more reported income, the higher the tax percentage. Typically, most U.S. taxpayers pay between 10% and 39.6% of their annual income in the form of federal income taxes. Your current tax bracket is easy to figure out by looking at your latest tax return, but your possible future tax bracket is probably harder to imagine. For comparing the advantages and disadvantages of traditional and Roth IRAs, it’s handy to have at least an idea of whether your future tax bracket will be higher or lower than your current one. 

With a traditional IRA, you’re getting a potential tax deduction now, but in the future you’ll have to pay taxes at whatever tax bracket you’re in when you start your distributions. So if you believe that your tax bracket will be lower in the future than it is now, there may be a tax advantage to investing in a traditional IRA.

With a Roth IRA, you’re contributing with money you’ve already paid taxes on so that money is not taxed at withdrawal, and everything the account earns can be taken out free of taxes after the account has been open for five years and you’re at least age 59 ½, disabled, purchasing your first home, or you’ve inherited the Roth IRA. So, if you anticipate that your tax bracket in the future will be higher than now, the Roth IRA may be a good option for you.

Best of Both Worlds

Can’t choose? You can actually contribute to both types of IRAs if you want to take advantage of the unique benefits each account offers. The 2016 annual contribution limit of $5,500 per year ($6,500 if you’re age 50 or older) can be split between your IRAs. And if you currently have a traditional IRA and decide a Roth IRA would be a better fit, you can always convert your traditional IRA account into a Roth

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1 2015 Investment Company Fact Book