or Roth IRA?
Accounts can be part of the foundation of a financially secure retirement.
For many years, millions of individuals have made annual contributions
to IRAs or used them to receive distributions from retirement plans on
changing jobs or retiring. Several years ago, a new form of IRA was created
called the Roth IRA. The Roth IRA offers some advantages over the traditional
IRA but comes with some limitations.
Here is a comparison
of some of the key features of each:
Anyone under the age of 70 ½ with earned income can contribute
to a traditional IRA.
For 2018 Roth IRAs,
single tax return filers can make full contributions to their Roth IRA
if their income is less than $120,000. The limit for joint filers in 2018
is $189,000. Partial contributions are allowed if your income exceeds
those amounts (up to $135,000 and $199,000 respectively).
Taxability of Earnings
Earnings on funds in a traditional IRA are tax deferred. Roth IRAs provide
for tax-free growth.
The contribution limits for both types of IRAs are the same. In all cases,
contributions must not exceed earned income.
- 2018 contributions
- After 2018, the
limits will be adjusted for inflation in $500 increments.
In addition, workers
ages 50 and over can make additional "catch-up" contributions
of $1,000 for 2018.
Contributions to traditional IRAs are deductible if you do not participate
in another qualified plan. If you are a plan participant, contributions
may be deductible depending on your adjusted gross income.
For 2018 contributions
to Traditional IRAs - Single return filers - full deductibility if AGI
is $63,000 or less and partial deductibility with AGI up to $73,000. For
joint return filers in 2018, the limits are $101,000 and $121,000.
Contributions to a
Roth IRA are not tax deductible.
Taxability of Withdrawals
For traditional IRAs, any earnings and deductible contributions are subject
to tax on withdrawal. All distributions from a Roth IRA are tax-free.
Penalty for Early
Both types of IRAs impose a 10% early withdrawal penalty tax on distributions
taken before reaching age 59 ½. There are a few exceptions for
death, severe hardship and other situations.
For a traditional IRA, you must start taking distributions in the year
you reach age 70 ½.
Which IRA is right
If your income level precludes you from getting a deduction for contributions,
the answer is easy - choose the Roth IRA.
If your contributions
to a traditional IRA would be deductible, the question is harder. Generally,
if you are younger, the attraction of tax-free distributions would outweigh
the immediate benefit of the deductions. If you expect your marginal tax
rates to remain at their current level or increase, the odds favor the
If you have significant
other assets and would like to use your IRA to pass significant wealth
on to future generations, the tax-free nature of the Roth IRA is extremely
Should You Convert
Your IRA to a Roth IRA?
There are some special rules that enable you to convert a regular IRA
into a Roth IRA. Many people find that the attractions of tax-free distributions
and no required distributions make a Roth IRA conversion worth considering.
However, there are limitations and costs.
Be sure to consult
your tax advisor if you believe converting makes sense. Most professionals
have software that can help with the analysis.