Traditional vs. Roth IRAs: Key Contribution, Age, and Income Guidelines
Posted: July 24, 2024
Updated: July 24, 2024
Two of the most popular Individual Retirement Accounts (IRAs) are traditional IRAs and Roth IRAs. You might be wondering, is it smarter to put money into a traditional IRA or a Roth IRA? Or should you do a mix and put some money into each type of account?
While both traditional and Roth IRAs are long-term savings vehicles with tax benefits, each has different rules concerning contributions, age and income. We’ll break down the differences to help you determine how to best allocate your funds.
When Are Contributions Taxed?
One of the most significant differences between the two types of accounts are how and when taxes apply to the contributions and earnings.
Traditional IRA contributions can be made pre-tax and will be taxed when you withdraw them. Additionally, you can deduct contributions from current taxes.
Contributions to Roth IRAs are made after tax. The benefit of this option is not having to pay taxes on qualified withdrawals, and no income tax is due when distributions are taken. Currently, the maximum contribution to either a traditional IRA or Roth IRA is $7,000 for people under 50 and $8,000 for those who are 50 or older.
What Are the Age Restrictions?
You can make contributions to traditional IRAs at any age. The required minimum distribution (RMD) age is 73, meaning you have to begin withdrawing a certain amount from your account. This must be done by April 1 after the year you turn 73. If you do not take the required RMD, you might be fined by the IRS.
Roth IRAs do not have an age limit for contributions, nor a minimum age for required minimum distributions. However, the account must be five years old before you can take tax-free distributions from a Roth IRA.
Both traditional and Roth IRAs have a minimum age for distributions, 59½ years old. If you withdraw money before age 59½, you may be subject to a 10% Federal income tax penalty. However, some situations qualify as exemptions, such as distributions to pay first-time homebuyer expenses or qualified education expenses.
What Are the Income Eligibility Limits?
You may be eligible to take an income tax deduction for contributions to a traditional IRA, depending on your income, your tax-filing status and if you participate in a qualified workplace retirement plan.
If you’re a single taxpayer, you aren’t participating in a qualified employer-sponsored plan, and earn a minimum of $6,000, contributions are deductible regardless of your adjusted gross income (AGI). However, there are income limits if you’re participating in an employer-sponsored plan.
If you participate in a qualified workplace retirement plan, you can contribute to a Roth IRA, but you can’t exceed the annual contribution limits if you’re also contributing to a traditional IRA.
A Roth IRA phase-out range is the amount you can contribute based on your income level. For a 2024, the Roth IRA the phase-out ranges are as follows:
- Single taxpayers: $146,000-$161,000
- Married couples filing jointly: $230,000-$240,000
- Married filing separately: $0-$10,000
Roth IRA is often a preferred choice for those who participate in a qualified workplace retirement plan and exceed the income limits for a deductible IRA but meet the income eligibility requirements for a Roth IRA.
Compare Your Options
As you assess which IRA, or combination of IRAs, will make most sense for you, keep in mind the following questions:
- Do you anticipate that your tax bracket will be higher or lower in retirement?
- What tax benefits, current and long-term, are available to you?
- At what age do you expect you’ll want to start taking your IRA proceeds?
Get Expert Guidance
Want a second opinion on your retirement or other investments? Meet with an experienced financial consultant from the Landmark Investment Center (LIC) who can sit down with you and analyze your personal financial situation. They can help you strategize an investment plan to meet your unique retirement goals.
Important Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax-free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.