Building Your Nest Egg: Traditional IRA vs. Roth IRA

Building Your Nest Egg: Traditional IRA vs. Roth IRA

TRADITIONAL IRA

Roth IRA

Up to $5,500 may be contributed annually with an additional catch up contribution of $1,000 available for individuals age 50 and older. Contributions may be tax deductible, but if either you or your spouse is an active participant in a qualified employer plan, your deduction may be reduced or eliminated depending on your modified adjusted gross income and filing status for the year.*

Up to $5,500 may be contributed annually with an additional catch up contribution of $1,000 available for individuals age 50 and older. Contributions are not tax-deductible.

Cannot make contributions past age 70 1/2.

Can make contributions past age 70 1/2.

A working individual not active in an employer-sponsored plan and a non-working spouse can each make annual contributions, as described above, without any income limitation.

The ability to make contributions are not affected by participation in an employer-sponsored plan.

An individual whose spouse is an active participant can make annual deductible contributions, as described above, with the allowable deduction for the year phasing out between a combined Modified Adjusted Gross Income (MAGI) of $189,000 and $199,000.

The deductibility of contributions for a married individual filing jointly and participating in an employer-sponsored plan phase-out with an MAGI between $101,000 and $121,000. The phase-out for single individuals who are covered by an employer sponsored plan is an MAGI between $63,000 and $73,000. For an individual who is married filing separately, the MAGI phase out is between $0 and $10,000.

The ability to make contributions are phased out for single persons with a Modified Adjusted Gross Income (MAGI) between $120,000 and $135,000, and for married couples, filing jointly, with an MAGI between $189,000 and $199,000. The contribution phase out for married couples filing separately is MAGI between $0 and $10,000.

Required Minimum Distributions (RMD) must begin by April 1 of year following attainment of age 70 1/2.

Required Minimum Distributions (RMD) are not required to begin when the owner reaches age 70 1/2.

Distributions before age 59 1/2 will be subject to ordinary income tax and a 10% penalty unless certain conditions are met.

Earnings portion of a distribution before age 59 1/2 is subject to ordinary income tax and 10% penalty unless certain conditions are met. 

Distributions after age 59 1/2 and after the Roth IRA owner’s qualified distribution five-tax-year holding period will be free of federal income taxes. 

Distributions after age 59 1/2 and before the end of the Roth IRA owner’s qualified distribution five-tax-year holding period will not be subject to a 10% early withdrawal penalty, but may be subject to ordinary income taxes. (After-tax contributions are withdrawn first, and no taxes are due until after all contributions are withdrawn and earnings begin being withdrawn.)

The 10% penalty will not apply for distributions for “qualified higher education expenses” for taxpayer, taxpayer’s spouse, children or grandchildren. It also will not apply for distributions up to a $10,000 lifetime limit for qualified first-time homebuyers expenses (expenses incurred by individuals who have not had an ownership interest in a principal residence for at least two years) if used within 120 days of purchase.

The 10% penalty will not apply for distributions for “qualified higher education expenses” for taxpayer, taxpayer’s spouse, children or grandchildren. It also will not apply for distributions up to a $10,000 lifetime limit for qualified first-time homebuyers expenses (expenses incurred by individuals who have not had an ownership interest in a principal residence for at least two years) if used within 120 days of purchase.

An account set up as a Traditional IRA can be converted to a Roth IRA without MAGI and filing status limitations. Taxes will be due on the deductible portion of the amount converted.

A contribution to an account or annuity set up as a Roth IRA, or amounts from a Traditional IRA that have been converted to a Roth IRA can be recharacterized to a Traditional IRA, provided the recharacterization is performed timely and all the applicable requirements are satisfied.

State taxes are generally paid on distributions.

 

 

In most states, there will not be any state taxes. Check your state for specific details because the state income tax treatment of your Roth IRA conversion and subsequent distributions may vary depending on your state of residence.

TRADITIONAL IRA

Up to $5,500 may be contributed annually with an additional catch up contribution of $1,000 available for individuals age 50 and older. Contributions may be tax deductible, but if either you or your spouse is an active participant in a qualified employer plan, your deduction may be reduced or eliminated depending on your modified adjusted gross income and filing status for the year.*

Cannot make contributions past age 70 1/2.

A working individual not active in an employer-sponsored plan and a non-working spouse can each make annual contributions, as described above, without any income limitation.

An individual whose spouse is an active participant can make annual deductible contributions, as described above, with the allowable deduction for the year phasing out between a combined Modified Adjusted Gross Income (MAGI) of $189,000 and $199,000.

The deductibility of contributions for a married individual filing jointly and participating in an employer-sponsored plan phase-out with an MAGI between $101,000 and $121,000. The phase-out for single individuals who are covered by an employer sponsored plan is an MAGI between $63,000 and $73,000. For an individual who is married filing separately, the MAGI phase out is between $0 and $10,000.

Required Minimum Distributions (RMD) must begin by April 1 of year following attainment of age 70 1/2.

Distributions before age 59 1/2 will be subject to ordinary income tax and a 10% penalty unless certain conditions are met.

The 10% penalty will not apply for distributions for “qualified higher education expenses” for taxpayer, taxpayer’s spouse, children or grandchildren. It also will not apply for distributions up to a $10,000 lifetime limit for qualified first-time homebuyers expenses (expenses incurred by individuals who have not had an ownership interest in a principal residence for at least two years) if used within 120 days of purchase.

An account set up as a Traditional IRA can be converted to a Roth IRA without MAGI and filing status limitations. Taxes will be due on the deductible portion of the amount converted.

State taxes are generally paid on distributions.

 

 

Roth IRA

Up to $5,500 may be contributed annually with an additional catch up contribution of $1,000 available for individuals age 50 and older. Contributions are not tax-deductible.

Can make contributions past age 70 1/2.

The ability to make contributions are not affected by participation in an employer-sponsored plan.

The ability to make contributions are phased out for single persons with a Modified Adjusted Gross Income (MAGI) between $120,000 and $135,000, and for married couples, filing jointly, with an MAGI between $189,000 and $199,000. The contribution phase out for married couples filing separately is MAGI between $0 and $10,000.

Required Minimum Distributions (RMD) are not required to begin when the owner reaches age 70 1/2.

Earnings portion of a distribution before age 59 1/2 is subject to ordinary income tax and 10% penalty unless certain conditions are met. 

Distributions after age 59 1/2 and after the Roth IRA owner’s qualified distribution five-tax-year holding period will be free of federal income taxes. 

Distributions after age 59 1/2 and before the end of the Roth IRA owner’s qualified distribution five-tax-year holding period will not be subject to a 10% early withdrawal penalty, but may be subject to ordinary income taxes. (After-tax contributions are withdrawn first, and no taxes are due until after all contributions are withdrawn and earnings begin being withdrawn.)

The 10% penalty will not apply for distributions for “qualified higher education expenses” for taxpayer, taxpayer’s spouse, children or grandchildren. It also will not apply for distributions up to a $10,000 lifetime limit for qualified first-time homebuyers expenses (expenses incurred by individuals who have not had an ownership interest in a principal residence for at least two years) if used within 120 days of purchase.

A contribution to an account or annuity set up as a Roth IRA, or amounts from a Traditional IRA that have been converted to a Roth IRA can be recharacterized to a Traditional IRA, provided the recharacterization is performed timely and all the applicable requirements are satisfied.

In most states, there will not be any state taxes. Check your state for specific details because the state income tax treatment of your Roth IRA conversion and subsequent distributions may vary depending on your state of residence.

Take the first step toward achieving your financial goals.

Learn More: Building Your Nest Egg: Understanding the Roth IRA

Dive deeper into the Roth IRA. Get tips on how to make your retirement fund work hard for your future through the Roth IRA.