The question over what is better in regards to a ROTH IRA versus Traditional IRA is one that many investors struggle with. The answer is not always so simple and straightforward. Every investor is different and who knows what the future will hold. Before we get into which is better for you as an individual, let’s take a look at the main differences between the two types of accounts and their features.

Traditional IRA:

The Traditional IRA, or IRA, has been around the longest and stands for Individual Retirement Account. This is a retirement account that is set up on your own or with an advisor and is not associated with any workplace retirement plan. Many times workplace retirement plans, such as a 401(k) or 403(b), can be rolled into an IRA after you retire or separate from service. An IRA is funded with pretax money, so therefore, it generally is tax deductible. Note, rollover amounts are not tax deductible as they have already received a deduction in the past and don’t count towards the annual contribution limits. At withdrawal, the money is fully taxable and is taxes as ordinary income. For the year 2018, the maximum you can contribute to an IRA is $6,000 unless you are age 50 or older. If you are 50 or older ,the amount increases to $7,000 a year. This is called the catch up provision. Another feature of an IRA, is once you turn age 70 1/2, you have to start taking out Required Minimum Distributions (RMD’s). This amount has to be taken every year and is based upon the account value and the end of the previous calendar year. The calculated amount is generally around 5% of the end of year account balance. Also, once you turn age 70 1/2, you are no longer able to contribute to your IRA. As a final note, many people get confused and think and IRA or ROTH IRA is a specific investment. It is simply a type of account, or “shell”, the different types of investments are held inside.

ROTH IRA:

The ROTH IRA is a newer type of retirement account that was created in 1997. ROTH IRA’s have been getting a lot of publicity and praise in the last handful of years over Traditional IRA’s. The basic premise of a ROTH IRA, is it is funded with after tax dollars. Therefore, you get no tax deduction for your contributions. The money still grows tax deferred in the account, but rather than being fully taxable at withdrawal, the money is entirely tax free as long as your are over the age of 59 1/2 and the account has been established for 5 years or more. Another important feature of a ROTH, is once you turn age 70 1/2, you don’t have to take an RMD like you need to in a Traditional IRA. In fact, you can continue to make contributions into a ROTH as long as you have earned income. Also, like an IRA, the ROTH has the same annual contribution limits.

Finally, there are also income limits and rules regarding whether or not you are also covered by a workplace retirement plan, such as a 401(k) that can affect your eligibility for ROTH IRA’s and Traditional IRA contributions. In our next blog post, we will cover these rules more in depth and help you decide which type of IRA is better for you.